Whenever an organization addresses their employee merit increase process, a common complaint that’s heard is, “we have too many employees rated too high.”  In other words, the performance rating distribution curve is skewed too far.   Too many employees walk on water, while too few are viewed as not carrying their own weight.

WHAT’S NORMAL?

• Distinguished: Up to 10% of employees

• Superior: 20% to 30%

• Fully Successful: About 60% or more

• Needs Improvement: About 10% to 15%

• Unsatisfactory: Less than 5%

The language used to describe levels of performance differs from company to company, and the percentage guidelines vary as well, but you get the point.  Most performance ratings would normally be expected to cluster around the middle, with increasingly smaller percentages moving out to the extremes.

But it’s worse at the top.

THE TRICKLE DOWN PROBLEM

Usually it’s for ill.

And why is that?  Why does management tend to think of their performance as somehow using a  different measurement stick or justification from the rest of the organization? It’s usually because actual performance seems to be less of a criteria for a rating than you would expect.  Sometimes it’s overlooked if not downright ignored.

Let’s take a look at some common management reasons for skewed performance ratings.  How many have you heard?

Entitlement:  When management feels that at least a portion of their annual bonus or merit increase is due them, “just because.”  It’s been 12 months and they feel entitled to receive their annual reward.  This is sometimes referred to as ‘delayed compensation” – in that the variable element is “how much,” not “if.”

Feel good: When you want the employee to feel good about themselves and the company.  When you want to recognize effort instead of results, or when the company has had a tough year and the employee has “hung in there.”  The employee deserves a raise simply for being there.

Retention:  When the rationale for the increase is that the company  has identified a particular employee as a talent that the company needs to retain.  This card is usually played when the increase / bonus process coincides with a time of reorganization.  Thus the reward is less about recognizing what the employee has done and more about not wanting to lose a valuable resource.

Please don’t quit: A close cousin to the above, when the manager fears that the employee will quit if they don’t receive a proper annual reward. This tactic is more about the manager not wanting to deal with the aftermath of a resignation vs. whether the employee’s performance deserves recognition and additional compensation.

Leaders need competitive pay: This is usually a fall-back position for the desperate, when no other logical argument seems to work.  The philosophy is that in order to retain leaders the company has to ensure that their pay is competitive.  This is not about performance at all, but keeping up with the marketplace.  Another example of simply sitting there as justification for regular increases in compensation.

Cannot or will not use the “2” performance rating: Here is a problem as old as the performance appraisal process itself.  Most companies use a five or seven scale rating system.  A few more use three, and even less often seen is the four-scale.  But whatever the system, some managers simply can’t or won’t rate an employee less than “average” – unless that employee is already pegged for termination.  The excuses are legion, but the result is that objective performance assessment frequently takes a back seat as the vast majority of employees are rated average or above.  And if marginal performers are bumped up into “average,” how do you think the average performers are rated?

Leadership is always rated higher than the regular folk: I put this last because it is rarely voiced out loud – though again and again we see it played out in the statistics.  For some reason, if you’re a leader and not being readied for termination, then you must be pretty good.  Having poor performing leaders is a strong self-criticism of senior management, and we can’t have that!

You need a bad guy.

Someone has to say “stop!” when ratings no longer make sense; when in summary they don’t correlate with how the business performed; when performance appraisals are poorly written, and when excuses are offered instead of objective assessments.

Lack of managerial discipline enables bad practices to continue, to even flourish and spread throughout the rest of the organization.

Whenever I ask a client senior manager to describe the company’s Return On Investment (ROI) from their employee compensation programs they usually react with a blank stare.  Like a deer in the headlights.  Is that because the question is unique, or it’s confusing or perhaps it’s simply an issue they hadn’t considered before?  Perhaps no one has ever asked them.

Eventually though, if you wait long enough, they’ll recover their glazed over look and stumble through an answer.  What they usually say is something related to employee turnover, that because not many employees are leaving their reward programs must be working “okay.” 

If I push a little and ask how they maximize the value of their reward dollars, they’ll hand me the good-old reduced merit increase budget story or perhaps reference a recent general adjustment or reduced payroll rise percentage. In other words, it’s often painfully clear that they really don’t have a handle on controlling their payroll costs. 

Unless prompted by more probing questions it’s fairly common for senior managers to consider their compensation expense challenge as only the incremental cost of doing business.  Which means that when it comes to the matter of monitoring or controlling such costs the “pool” of money under discussion is only the annual increase budget.

However, if you compare your company’s total employee payroll against the impact of reducing the annual merit budget by even one full percentage, you’ll see how far off the mark the respondent was.

I would submit to you that every dollar spent for employee labor is a compensation expense.  Using that premise a company’s labor costs typically range from 40% to 60%  of their company’s revenue (excluding benefits). That’s a huge number, and playing with the cost of the annual pay rise pales by comparison.

Trying a different tact

When I ask that same client whether their compensation program is working for them, doing what it’s intended for them, I usually get served back that same befuddled look.  Sometimes they actually resent the question.  How dare I!  Eventually though they’ll again bring up their turnover statistics, as if somehow that percentage (if being used as a metric in the first place) has a 1:1 correlation to compensation program success.

It doesn’t.

Managers, especially the mid-level variety, are commonly ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them. This is not surprising though, given that the cadre of newly minted managers are routinely given authority to spend the company’s money (hiring, promotion, pay rises, etc.) without the benefit of any managerial training.  Is making the right pay decision supposed to be intuitive, like learning to operate a new Smartphone?  Often times these new managers fail to make decisions that are in the best interest of the company; theirs are more commonly on the basis of subjective emotions, a desire to be liked, an exercise in personal power or for a host of other reasons that may or may not relate to an individual employee’s actual job performance.

The net result from these well-intentioned amateurs is a rising fixed expense of running the business – as illustrated by ever increasing payroll costs.

This can be a huge problem for any organization, but even with this stark reality it can be very difficult to get many in senior management to face the challenge.  Most are reluctant to take concrete and perhaps painful steps to gain more value from their payroll dollars, until they’re finally led to understand what constitutes the controllable elements of employee cost – and how to impact that expense.

Ignorance of the law is not a valid defense, I’m told.  Perhaps we should challenge our leadership, our management, to actually manage what is usually the company’s largest single expense item.

It can be done.  But not if you ignore it.  Not if you keep looking for that EASY button.

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the message was lost.
For want of a message the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.

This proverb has come down in many variations over the centuries, yet the principle it embodies remains as true today as when first recorded.  If you ignore the small stuff long enough it will eventually become the big stuff; big problems, big expenses, big challenges to fix.  And big headaches.

Examples are legion; forgetting that simple oil change for your car; not taking the time to brush your teeth or take your daily medicine; delaying the install of free virus protection for your computer; or simply procrastinating as a way of life.  The little things can get lost in the midst of our active lives, but we ignore them at our peril.

Lack of action, lack of attention will bite you in the butt, eventually.

For compensation practitioners the “little things” are often not so much the “I can do it later” catch-all busy work we all seem to have too much of, but the fundamental building blocks that anchor the foundation of your rewards philosophy, your programs and ultimately your cost structure.  Screw up the details here and the consequences can be serious.

For example, if you ignore your salary structure (“oh, we looked at it a couple of years ago“) you run the risk of it becoming irrelevant.  And an irrelevant structure becomes a recipe for inequitable treatment, special deals and increased payroll costs. As does ignoring the blinking danger signals from your dashboard metrics.

And while managing job descriptions is usually relegated to the junior staff, inaccurate or out-of-date documentation can be the bane of your existence, from cost control to employee morale issues to court action.

Little things aren’t always unimportant things

How can a fundamental building block become a “little thing”?  It’s all in the attitude.  Folks like to focus on the exciting projects, the sexy initiatives and those experiences that can help build and polish their resume.  Routine tasks are often given short shrift while we look elsewhere for the interesting, the challenging, the more visible aspects of our jobs.  Or the jobs we’d like to do.

Ask yourself, who would want to work on a merger or acquisition project?  The hands go up.  Who wants to work on an international project?  The line of those  who are interested quickly forms.  But if you would ask, who wants to work on maintaining the existing reward system?  That is, worrying about documentation, about record-keeping, about the fundamentals. 

Not so much interest there.  Boring!

But somebody has to do it.  Because if you don’t, the wheels will come off the car, sooner or later.  And then senior management will be asking, “who’s responsible“?

Perhaps the answer is to mix it up, to have a bit of the humdrum blended in there with the exciting stuff.  So maybe you’re working on job descriptions and job evaluations part of the week, and then an HR Transformation initiative later on.  You can be market pricing surveys on Monday and Wednesday, but on Tuesday and Thursday you’re re-designing the management incentive scheme.

Ahhh, but I know what you’re going to say.  Who among us has the option of picking and choosing our projects, so that we’d be able to unilaterally design our work schedule, to blend the routine with the exciting?  That never worked for me when I was in Corporate America.

But isn’t there something to be said about doing the job, any job, well?  Doing so says a great deal about you as a professional, and as a person.

Don’t lose sight of what you might consider the “little things,” the basics and routines that need to be completed “just because”  in your work.  Think of it like changing your oil.

You and your car will be better for it.

January is a busy month with compensation communication, but just how effective is yours?  Perhaps all you’re doing is talking to yourself.

____________________

I read a movie review the other day and noticed that, in the first few paragraphs there were two words that I didn’t immediately understand.  The words “bifurcated” and “atavistic” were used, presumably to help readers better understand what the reviewer thought of the movie.

Well, those two words are not part of my everyday vocabulary, and upon reflection I might be able to explain “bifurcated,” though aren’t sure what that has to do with the subject movie.  As to “atavistic,” I think that I’ve heard the word before, but really don’t know what it means.

Now I consider that my intelligence level is a bit above average, so I have to wonder – who the heck was the reviewer talking to with their review?  I certainly didn’t “get it” as far as whatever points they were trying to make.  And NO, I didn’t drop everything to look up those two words.  What I did do was stop reading the review.

Who are they talking to?

This is especially important when considering your compensation communications.  If you want someone to hear what you have to say, to understand your message or point of view, to learn from reading your words, you have to talk to them at a level they are comfortable with.  Not you.  This is not about you.  Or at least it shouldn’t be.

There’s a lot of information out there, a problem for our times, some would say.  So if you want to get your message across, you need to be able to reach your target audience with as simple a message as you can.  So they all can understand, so they can repeat it to others, so that they’ll remember it tomorrow.

Is your text written at the New York Times 8th grade level?  If not, why not?  Don’t try to impress your audience.  It doesn’t work.

Losing your audience

A similar experience happens when listening to a speaker at a compensation conference, a webinar or even at your local professional  association meeting.  The speaker uses a word or phrase that is foreign to you.  “What did they say?”  Your mind stops listening as it struggles to identify the strange word and what it means – and then to put it in context.  Maybe you’ll figure it out.  Maybe you won’t.  Meanwhile though, the speaker has kept on talking – but you haven’t been listening while your mind was paused.  Now you have a struggle to catch up.  Maybe you can.  Maybe you can’t.

And then it happens again.  Another mind pause while you mentally translate, “what was that again?”  And so it goes, and you never quite fully understand the speaker’s message. 

That’s not communication.  That’s a speaker talking to a mirror.  You’re incidental.

The writer’s club

That’s what I call it, to describe the majority of contributors to professional journals.  I’m on the article review committee for one of those magazines, and I often wonder who these authors are writing to.  If they were trying to educate or explain practical tactics that would assist practitioners with their immediate problems, then I’m afraid that many an article wouldn’t pass muster.

That’s because many articles (check it out) are written by academics and consultants, not practitioners who have dirt under their fingernails from working in the trenches.  As a result practical advice (what can I do now?) is usually in short supply. What we all too often get instead is conceptual “stuff” from the view at 30,000 feet, broad inspirational white papers that you just know your senior leadership won’t even consider.

This isn’t always the case, of course, but how many of those articles are you able to wade through before your eyes glaze over?   Not just read the words, but learn from?  Heavy stuff.  Heavy lifting.

When someone is communicating, is actually reaching you with their message, you listen, you absorb, you learn.  It’s the same for me.

So talk to me, not to the mirror.

Have you ever visited the Post Office, or the Department of Motor Vehicles (DMV), or had the opportunity of spending quality phone time with a government employee?  Of course you have, and it can be a frustrating experience.  You need help, or advice, perhaps a creative solution to your problem – maybe simply someone to point you in the right direction. 

Argghhh!

More often than not what you’ll get instead is a quote from a policy or a regulation that doesn’t help you at all.  And this is usually accompanied by an air of indifference for your circumstances.   Should you dare ask them, why? they stumble, seem a bit startled at the question, and then finally repeat what they said before – usually word for word.

When I was an expat living in England I was able to cruise all over the country for a full year on my international drivers license.  This was driving on the wrong side of the road – and with a manual transmission.  The experience gave me and those with me a few close calls.  But no one questioned the risks I took or shared with other drivers; just get off the plane and drive off was the common practice.

However, after that initial twelve months expired the bureaucrats wanted me to get a British license, which meant a period of driving with Learners tag prominently displayed on the car (L) and taking a written as well as a driving test.  When I asked the clerk why I was required to act like I was 16 years old again the fellow’s eyes glazed over as he parroted the regulations.  When I said, “but that makes no sense,”his only response was repetition.

Though he was very pleasant about it.

Bureaucrats are everywhere

Cute story, isn’t it?  But the humor might wear a bit thin if you find the same experience where you work.  Consider those managers who treat their employees in a similar manner, including that air of indifference.  How do they react when approached by an employee thinking outside of the box; or when a request falls outside the norm?  Too often I’ve seen managers play the bureaucrat card and quote the rules.  “That’s against company policy,” or “we never do it that way,” or even “that’s the way it is.” 

In other words, they don’t seem to know the reasoning behind their own response, so they parrot a rule or a policy or even a common practice – all without stopping to think whether what they’re saying makes sense or is helpful to those who have come to them for assistance.  It’s like a parent saying, “because I said so.”

Why do they do that?

Let’s face it, it is easy to say, “That’s the policy” without taking the time to understand the reasoning that goes behind the policy.  Kind of a knee-jerk response.  It’s safe, you can’t get blamed, and the questioner goes away.  But is that the right answer for the circumstances?  And is that what you want, for your employee to simply go away?

What do employees think when treated in such a fashion?  In polite terms they’ll write the manager off as a waste of time.  “Won’t go there again.”  And so goes morale, engagement, collaboration, team effort, productivity and every other positive aspect of employee relations.  Poof!  Just like that.  Blow them off and they do the same to you.

So don’t do that.  Don’t make decisions – just because.  Don’t parrot what you can’t explain.  Have a reason for what you tell employees.  They don’t have to agree with you.  But you owe them the courtesy and respect of considering their point of view and to respond in a thoughtful manner.  They deserve a proper answer, not something taken off the shelf.

Btw, I never did bother getting my British driving license.

It’s that time again.  The end of the business year, when managers everywhere turn their thoughts to – bonuses!  The calculators are out and every eligible soul from Marketing to Manufacturing to Sales, IT, HR and the Executive Suite tries to figure out how fat that check will be.  For many, it’s the gift receiving season.

And thus the same bad script repeats itself for the annual management incentive process, year upon year upon year:  objectives created at the last minute, embellished accomplishments artfully recorded, problems and shortcomings diminished or forgotten and assessment forms looked at with bureaucratic disdain – as in, how do I fill out this thing to pump up my results?

More than the mechanics are at fault

Oh yes, the process is flawed, yet the foxes are in charge of the chicken coup – and they offer little hope for reform.  Why?  For those in charge the process works, and self-interest pays its own rewards.  Picture a belated Santa Claus with a large bag of goodies.

Cynical?  You bet.  For many of us in the trenches true pay for performance is an elusive concept best remembered from Compensation 101 textbooks, suitable only for life as it should be, not as it is.  Sad to say, but senior management is often the worst offender.  I’ve seen senior executives manipulate or adjust financial results to ensure that their own incentive awards wouldn’t be reduced.  Senior staff deserves competitive incentives, don’t they?  How can you not reward your senior leadership for their efforts?  And so once again entitlement trumps performance.

Studies suggest that the I-deserve-it mentality has weakened through this recession and slow recovery.  However I’m convinced that it’s still alive and well wherever rewards are viewed as payment due for time served and effort, not results.

But we go on hoping, one company and one client at a time, trying to persuade leadership that it’s primarily good performance that should provide rewards; that tenure isn’t a compensable factor, that incentive payments should be earned, not simply an automatic gift of delayed compensation.  Lower level employees are expected to earn their rewards; shouldn’t the same case be made for management?

End of year expectation

Have you ever told an executive that their annual incentive might be reduced because of either corporate or individual performance didn’t meet expectations?  They would look aghast at the possibility.  I’ve taken calls from spouses asking when the money would be available (post Christmas sales) – who then grew upset when told of the review process and that the Board of Directors has to approve.  The common attitude was, times up! – where’s the money?

Will the situation be any different for the bonus cycle in 2014?  I hope so, but bucking the trend of human nature is far from a sure bet.

To change those dynamics, as well as the effectiveness of your incentive plans you need to stand up and speak up.  The process is starting now, so it’s not too late to have an impact, to instill a management pay-for-performance philosophy in your company – even if it’s only one step at a time.  

·         Performance appraisal shouldn’t be an activity list (I was very busy), but a focused statement of achievement against quantifiable and measureable objectives.

·         Let the assessment tell you the rating, not the other way around (“how do I fill out this form to give a 4 rating”?).

·         Confirm that the language on the assessment form corresponds to the performance rating.  Oh yes, you have to check.

·         Assessment forms should be required before an incentive payment is made – negating an old procrastination trick (“oh, just process the check.  I’ll get the form to you . . . tomorrow or the next day”).

·         For the 2014 cycle, start by having objectives established early in the year, not in an after-the-fact rush at the end

Granted, you’ll need more than a steely look and a waving flashlight to stop a speeding freight train, so you should educate management about their ineffective and wasteful practices before the cycle starts.  Because afterward is usually too late; discipline as a learning tool is best used to prevent problems, not when Santa is already reaching into his bag of checks.

Maybe this can be your New Year’s resolution?

It’s likely that your pay-for-performance program has a fatal flaw built into it; an inadvertent side effect of the design that, if ignored by management will almost certainly guarantee failure.

 But no one wants to talk about it.

Instead, what you’ll hear is a steady drumbeat of, “Oh yes, we have a pay for performance program.  All our employees are rewarded on the basis of their performance.”  But what if those merit increases won’t be enough to move an employee from low in their salary range up to the midpoint, the “going rate?”  What if merit increases alone won’t assure competitive pay?

The problem

Over time increases to the external marketplace will outstretch the company’s ability to keep pace through rewarding performance.  Annual performance awards can’t keep up with increasing market values and often new hires will be paid more than current, experienced employees.

The company usually describes their midpoint as associated with the market “going rate.”  Thus any employee who has performed their job responsibilities for a set period of time without performance penalty will reasonably expect that their pay rate should at least equal that market rate.

That sounds like a fair and reasonable expectation.

When that doesn’t happen though, when individual pay remains below midpoint / market, the employee’s disappointment over perceived unfair treatment can fester into lower morale and disengagement, which in turn often leads to separation.  If the employee is a high performer, the company has just suffered a significant loss.

Doesn’t happen here, you say?  Then test yourself.  Ask Human Resources how their pay-for-performance system works over time, over several years.  Ask them how they’re going to move a new employee’s pay from the minimum or low end to the midpoint value.

I wonder what they would say.

Look at the numbers

Let’s look at an example: say you’re hired at the bottom of the salary range, at $80.  The midpoint is $100 and the maximum is $120 (typical salary range).  Your compa-ratio is 80%.  After three years with the market / midpoint rising at approx. 2.5% per year, the $100 has become $107.70.  Meanwhile, let’s say you’re performing well, receiving 4% annual increases.  After three years your pay is now $90, and your new compa-ratio is 83.6%.

If you believe that three years of satisfactory (or better) performance has brought you to a point where you are thoroughly familiar with the job, and therefore should be paid the “going rate,” guess what?  You’re stuck at 83.6%, while the moving “market” remains at 100%.

And if you’re fortunate enough to receive a promotion?  Chances are your present 83.6% compa-ratio will likely have you starting the new job similarly low in your new salary range.  So the self-defeating process starts once again.

But what if you’re not promoted?  How many more years will it take to get you to competitive pay?  Are you willing to wait that long?  Or will you become another statistic in the company’s turnover rate?

The causes that make the effect

This doesn’t need to happen, but all too often does.

•  When a company is caught up in an “everyone deserves a raise” mentality, there isn’t enough money left over to properly reward the higher performers.

• Many companies don’t provide significant reward differentials between performance levels.  Is 1% or 2% enough between your stars and “Joe Average”?   Are you motivating through pay, or simply administering?

• When managers fail to consider employee contributions vs. the evolving competitive market.  When decision-makers ignore external realities and instead focus solely on internal balance (equity). 

• Merit budgets are not designed to address the issue of “market creep.”  It’s as if the company presumes that the external marketplace isn’t moving at all.

With the above as backdrop an organization’s internal pay practices can easily become disconnected from an employee’s market value.

Not many companies recognize this inherent flaw in their pay-for-performance program.  Individual managers may notice the danger, but most organizations tend to turn an official blind eye.  Granted, most don’t have the extra money that would be required to jumpstart employees to match their growing marketability.  They don’t have enough resources to be fair to everyone; it just costs too much.

Instead, they prefer to take one year at a time, all the while telling employees that the merit system works.

That’s where the cynical viewpoint of some employees is created, suggesting that quitting and getting rehired is a sure way to get the money you deserve.  It’s a risk, but I’ve seen that tactic work.

What can you do?

Develop a Ring Fence: identify your key employees and make sure that they are both competitively paid as well as appropriately paid for their value to the organization.  Build a protective “fence” around these employees, similar to “franchise players” in professional sports.  These are the ones you can’t afford to lose – so keep track of their compensation packages.

Then every year review your entire staff.  Who is paid properly and who is not.  Having this knowledge is half the battle, halfway toward a solution.  Because from this point individual corrective tactics can be devised.

Caution: you may have to decrease or even forgo some increases for “Joe Average” employees.  Can you do that?

—————-

The merit pay process usually works well for one full cycle, but for the long term the mechanics don’t provide the compensation level that the employee is worth.   Management touts their merit reward programs as a one-time event, but over time employees will see the fly in the soup, that unless one gets promoted on a regular basis the “system” actually works against you.

But no one wants to talk about it.

It’s human nature to look for simple solutions to perplexing problems.  Simple avoids confusion, keeps you “on message” and helps (you think) create greater employee awareness and appreciation of programs and policies.   However, when you’re dealing with the diversity and complexity of international compensation it’s just not that easy – nor should it be.   For those seeking the simple life it can be difficult to understand and accept that each country operates in a different environment from the next. 

There is no cookie cutter out there.

Perhaps because of its long history of isolationist tendencies, or perhaps it’s due to a bit of Yankee arrogance, but U.S. managers tend to struggle with the challenge of this “no, we’re not all the same” concept more than many other players on the global scene.

For the most part U.S. managers don’t want to hear that pay levels in Finland, or Argentina or Tunisia are different from the U.S. – even for identical jobs.  Instead, they would rather treat everyone the same, call it globalization and with a pat on their shoulder consider themselves a one-world player.  But those who push such an agenda of simplicity foment and spread a misleading distortion of the facts, a twisted sense of reality that they’ll find very costly to implement, and its inevitable results will more than likely irritate key talent within their workforce.

Consider the senior manager who simply wants to convert a foreign national’s salary into U.S. dollars – based on a concern with what they call “internal equity”?  The assumption is that everyone pays approximately the same for an “XYZ Manager” – or should.

“We pay $60,000 for the job; what’s that in Euros”?  Or worse . . . .

“When we convert our UK employee ‘s pay to dollars the pay is less than their U.S. counterpart.  We have to do something.”

No, no, no.

Other considerations:

• If simple conversion was a viable approach, why don’t we see such formulae prominently displayed by highly reputable salary survey providers?  Why are all figures reported in local currency?

• Local national employees will be skeptical of the simplistic approach, as in their mind too many local realities would be ignored in favor of what is perceived as Company standardization for the sake of administrative ease.  And that somehow they’re saving money at the employee’s expense.

• Lacking a strong correlation between country pay levels you will either needlessly increase your compensation costs, or under-value your employee talent and risk disengagement – or worse.

I once developed a formulaic approach that explained to a COO why he could not (should not) establish internal equity between the U.S .and the UK by simply converting GBP into USD.   I factored in a host of elements, including local taxation, competitive pay levels, incentive practices, cost of living, required social charges, benefit costs, etc. to make my case.   My point was that a simple conversion would be a distortion of the economic realities that drive pay levels in both countries.

Sad to say, but the explanation was ignored and the COO, though he acknowledged the logic of my argument, continued to prefer a simple conversion to establish relative values in his own mind.  So every time the conversion issue arose we had to rehash the myriad differences between countries, in order to remind decision-makers that apples are not oranges.  That there is no universal fruit.

To operate successfully on a global basis management needs to understand, to truly believe that each country operates like a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 comparison with any other country a distortion that will cause you to either over spend or under spend your reward dollars.  Either result should be avoided.

I really don’t.  Can someone explain why some companies are interested in what other companies are planning to do next year with their salary range midpoints?  I presume that’s what’s happening, because there are surveys out there compiling and reporting such data.  But who really cares?  Aside from anecdotal information I’ve never understood the importance of this reporting.

To be fair, perhaps my experiences are the exception, as I’ve never used such information in program analysis, or even reported it.  But somebody must be using it. 

Somebody.

I can only guess that I’ve missed something; maybe I should have taken another WorldatWork class, because the issue has never arisen from any organization I’ve worked with, either as an employee or as a consultant.  Which leads me to ask, do some companies actually propose raising their midpoints on the basis of a survey listing what other companies are doing?  Is that metric as important as what’s being paid for jobs, or what the average merit spend might be next year?  How does someone else’s projected salary structure movement relate to my company’s particular situation?

Can you envision  recommending  to senior management that midpoints be raised by X% – because that’s the projected midpoint increase of other companies? 

The focal point of my survey analysis has always been to determine the competitiveness of current  midpoints and actual pay practices.  In planning for next year I can see adjusting those midpoints to either remain competitive (our midpoints are already there),  to improve our standing (our midpoints lag the market), or freeze them (midpoints already pegged above market rates), no matter what a survey said was common practice.  Am I wrong here?  I’ve always thought that my company’s salary structure should move in relation to our own competitiveness, regardless of what anyone else is doing.  Otherwise we could be making the wrong adjustments – either too much or too little.

And what about the expense involved?  Contrary to what some pundits have assured me from time to time, midpoint growth can create costs.  There’s no free ride.

·     When an employee’s base pay drops below salary range minimum on January 1st, do you cover that amount – or wait until the next review?  Whenever that might be.  The fair decision would be to raise the employee to minimum and then (or later) grant a merit increase on top of that.  Extra cost though, right?

·     Higher midpoints push experienced employees further back from the internal “going rate” – creating pressure to restore the balance.  Have you ever explained to a long service employee why they weren’t being paid at least the midpoint?

And when exactly are these midpoint estimates made?   How predictive are they?  In reality they’re guesstimates, and many times the questionnaire is completed in haste, just to get the form submitted.  After all, most companies won’t confirm their new structure commitment until late November, while the survey questionnaires are completed in mid-summer. 

How good is your crystal ball in August?

Btw, a company’s salary structures (grades and salary ranges) are usually segmented along the lines of hourly, non-exempt, exempt professional, and management employees.  To gain a clear picture of your total competitive marketplace you should consider that each segment is moving at a different rate.  For example, it’s likely that management pay is growing at a different percentage than for hourly employees.   Suggesting that only a single figure would reflect your entire population would distort the reality of your multiple competitive markets.

Now I suppose there may be companies out there that have changes to their reward programs contractually tied to “market movement” or even midpoint growth, but in this day that number is likely a very small minority.

So, can someone  tell me why analyzing someone else’s guesstimated midpoint movement  is important?  I’d really like to know.

A company’s sales incentive plan is like the Pied Piper from the childhood fable; it plays a tune and the sales force follows behind.  Wherever the Pied Piper leads, the sales force will go – whether it be down the straight and narrow toward a bright tomorrow, or into the rough, down the hillside, through the brambles and over the cliff.  Because the melody being played is about money, and when that tune catches the ear those chasing behind will follow it anywhere.

I was once brought in by a client whose sales incentive plan rewarded the sale of products that generated a loss on each sale.  And it wasn’t part of a loss-leader tactic, either.  The sales reps were rewarded – even though their actions were detrimental to the company.   Bad behavior was rewarded, and therefore it was repeated – over and over again.

Which begs the question, why would a tactical plan for incenting sales employees encourage actions that don’t support the company’s own self-interest?  Isn’t anyone watching the store?

What behavior do your own plans reward? 

Do you know?

It’s up to those who design the sales incentive plans to carefully pick the right pathway.  Because as long as the money is flowing the sales rep isn’t going to raise a red flag and ask, “are you sure you want us to do this?”  That’s not going to happen, as most incentive plans are not self-correcting.  The lemmings will race over the cliff as long as a dollar bill is waved in front of them.

Have you looked at the details of your own plans lately?  Do they outline a plan of action that rewards the right kind of measurements (sales volume, revenue, margin, market share, etc.) that support the company’s objectives?   That drives an employee behavior that helps to deliver business success?  Do you expect a Return on Investment (ROI) for the incentive money you’ve targeted for payment?

Get your checklist ready

While there might be more variations in sales incentive schemes than snowflakes in the winter sky, certain fundamental design elements do apply as prerequisites for success.

• First and foremost the company has to succeed.  Only sales targets whose achievement advances the company’s bottom line should be used to incent employees.  Are you paying for busy work?

• Spell out what you want the sales force to achieve.   Can employees tell you what their specific targets are?

• Provide enough reward to change behavior.  Like any incentive, if you want to encourage a certain behavior you need to place a carrot out in front.   Not enough reward usually equates to not enough effort.

•  The greater the selling effort, the greater should be the reward.  If your reps are simply taking orders (product sells itself), are you paying for what would have happened anyway?

• Make sure you can measure  performance against quantifiable milestones.  Are payments made on the basis of measurable results or discretionary judgment?

Yes, there are other important criteria for sales plan success, but unless you start with a clear map that details where you want your sales force to focus their efforts, you run the risk of missing the mark – which can be an expensive mistake.  You will need a team effort, not the disconnected activities of individually focused entrepreneurs.

The success (and continued use) of a sales incentive plan should be measured by the success of the business, not by how busy employees are, or even how much revenue is generated.  Unless activities can be measured and achieved, and support the company’s business plan, you’re better off with a straight base salary plan (horrors!).  Because providing incentive rewards that don’t advantage the company is often paying for busy work.

So ask yourself, does your sales incentive plan encourage the right sort of behavior, activities that will drive business success?  Are you paying for the results you need?  Are you getting your money’s worth?

It might be time to check.