“Why doesn’t my Company consider inflation when determining my pay increase?”

Have you heard this question before?  What this employee is actually asking is: “Shouldn’t my annual pay increase percentage at least match increases in the cost of living?  And as management is always talking about the company’s ”pay-for-performance” philosophy, shouldn’t my increase be higher than that, given that I’m a good worker?”

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Have you ever been in a situation where an employee complains to you that their pay increase is no better than the inflation rate?  Or worse, that it’s lower?  As a further aggravation they might ask you how the company can say there’s a pay for performance policy when all they do is grant increases that no more than match the inflation rate?  Isn’t that like treading water, just staying in place without moving forward?  Is that fair?  Where is the reward for good performance?  Shouldn’t everybody receive at least the inflation rate?

The truth of the matter is that it’s common practice for companies to only give a side look at inflation (cost of living) when determining their annual pay increase budget.  They do make note of it as a reference point, and to compare against a final decision, but what they’re actually focused on are two prime considerations: 1) competitive market survey data that tells them what everyone else is paying for like jobs in their area; and 2) the expense (annual grant and fixed costs) to maintain competitiveness.

Competition and affordability

Companies routinely promise to pay competitively, and as such will analyze what they consider the marketplace to learn what other companies are paying for jobs (base salaries) and standards for increases.  Their so-called “promise” does not include the granting of inflation-proof increases, or even to reflect the cost of living in their analysis.  Their intent is to pay employees a competitive wage – including increases – and competitive means what others are doing, not necessarily what’s happening in the world of inflation.

If budget is an issue for any given year, it’s likely that maintaining competitiveness will have to suffer.  Consider the past two years of layoffs, wage freezes and reduced increases as recession gripped the country.

Is that fair?  Well, let’s imagine that your name is the one on the company door.  How would you plan to spend your money?  Likely you would seek to pay the least that you can, while still attracting, motivating and retaining qualified talent for your business.  That doesn’t mean you would lower pay levels, but as the owner you would want to allocate your substantial payroll expense as effectively and efficiently as possible to staff your business with qualified and engaged employees.  It wouldn’t make good business sense to spend more than you need to, for any overhead, be it facilities, raw materials or employee compensation.

Consider the market for talent as similar to making a purchase at a retail store.  How frequently would you pay more than the advertised price if your extra money purchased nothing more than the same item?  Chances are you wouldn’t often take that approach.

The view from the other side of the desk

Now let’s consider the employee perspective.  What factors weigh heavily on their minds when considering the potential for pay increases?

Most employees expect management considerations to reflect the inflation rate (cost of living), the average increase for their industry / geography (typically as pointed out by newspaper “factoids”), and – if the company had a good year – a share of the financial success.  You can be sure that the figure employees have in mind is the highest number calculated from the three possibilities just mentioned.  And, lest you forget, that figure is for the average performer; better employees should receive more.

Now this view is not necessarily wrong, from their perspective, and one certainly can’t blame employees for a viewpoint that puts their interests first.  However companies typically maintain a “this is a business first” strategy, that seeks to minimize controllable expenses without losing sight of their competitive pay target.  The goal of paying competitive wages, a concept hard to argue against, is not likely to be overturned by changes to the cost of living, newspaper snippets or a feel good moment following company success.

Another factor to consider is that employees are comfortable with changing their reasoning from year to year, while companies are stuck on the same track.  So when inflation goes up or down, or the company has had a good (or not so good) year, or the media is touting higher or lower industry averages, employee expectations may likely swing from one argument to another, rationalizing a consistently more aggressive pay increase strategy.

Now a little tongue-in-cheek: turnabout is not considered fair play.  Employees would not want the size of their increases to fall with their chosen economic indicator.  It should only rise.  They would object to smaller increases if the company hit a rough patch, or if inflation nosed downward.  You shouldn’t be surprised that they want their cake and want to eat it too.

However management strategies tend to be consistent over time, continually focusing on the marketplace and its affordability to maintain their posture of providing competitive pay and pay opportunities.

So how do you avoid a clash of employee expectations with management strategy?  If companies would communicate pay philosophy or strategies they would be able to allay the employee guesses and assumptions that always accompany the grapevine and rumor mill.  Employees would know in advance what to expect.  They might not like what they hear, but the employer / employee relationship would be improved by some straight talk about how the company determines pay increases.

Everyone out there, no matter what they are responsible for, has certain tasks or responsibilities as part of their job that they enjoy doing.  Likewise, there are certain other aspects to the job that they . . . would prefer not to have to do.

Often the emotional reaction is even stronger.

I work in Human Resources, and personally have never liked being responsible for job evaluation.   A thankless task if ever there was one, and one certain to impact the number of Christmas cards I received each year.   But that’s another story.

Line and staff managers have their own likes and dislikes as well, but it’s a hard-and-fast certainty that they don’t like to write job descriptions.  Why?  Because they hate them, and will look sideward at HR when they see us coming.   We’re the folks who insist on bothering them with this administrative hassle.

Yep, that’s what most of them think.  But why?  What are the friction points that cause so many Managers to start grinding their teeth when the subject even comes up?

• Many don’t see the point:  most view the writing (preparation) of a job description as a make-work effort, when “everyone knows” the job already.  So why do we need to do it, they grumble.  Why do we have to write it down?

Or, why don’t you do it?

They consider this onerous task as filling an HR need, not one of their own.  So it’s not a necessity, not a priority and certainly doesn’t help them.  To be fair though, not everyone feels as strongly, but you’ll see this reaction often enough to sense a common behavior.

• The formatting is not manager-friendly: so-called HR “specialists” are always tinkering with the form template, seeking a better way to describe a job.  But that better way usually results in a description preparation process that is overly long, tedious and a drudgery to follow.

After all, how many ways can there be to describe the tasks and responsibilities of a job?  Here is where HR consistently shoots itself in the foot, by making the simple more complex, the straightforward more convoluted and an easy job becomes a trying ordeal.  At least that’s the way it looks from the manager’s perspective.

• They take too long to complete: over time the forms get lengthier, the instructions more complex and the questions that need to be answered more numerous.  And the result?  When something you don’t like to do takes a long time, what naturally follows is a combination of delay and reduced quality.

Some Managers will also rush the process, will have the employees themselves do the work (a separate challenge), will ignore information sections, will fail to properly complete others, etc.  A real mess can be sent to HR.

• Rumor: better writers get better deals: managers don’t look at themselves as writers, and they can’t seem to shake the bias that better written job descriptions get higher job evaluation scores.  “If only I could word this right,” is a common self-criticism, as if the reader takes every turn of phrase as gospel.

So another reason for delay is because they know they’re not very good at writing descriptions, so they put off starting.  Just like a homework assignment.

• They have better things to do: this is the bottom-line criticism, the core reason from many a complaining manager; “I’m a manager; I have a department / business / empire to run.  I don’t have the time to waste writing job descriptions.” In other words, you do it – and they don’t much care who the you is.

Not a pretty picture, is it?  But it doesn’t have to remain that way.

In my next article we’ll flip the coin and look at what you can do about this hatred-thing.  There are ways to create a win-win scenario, and perhaps even get a smile (albeit a small one) from your management contacts.

Stay tuned.

How many success stories have you heard about or read about that started with the phrase, “We took the easy road?”

It doesn’t work that way, does it?

Yet again and again we see examples of companies trying to push that “Easy” button, often in the face of business logic.  That’s especially true when dealing with the diversity of an international workforce.

Most companies with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure.  They do this to level the playing field for those with multiple country responsibilities, or for those whose assignments take them from country to country.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees (hourly, professional, management) face a challenge and a risk when it comes to the decision as to how to reward performance  in each of their operating countries.  Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to somehow equalize pay practices?

For those charged with developing strategies to effectively reward employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions.   This strategic desire to recognize country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, those who traditionally look for the easy way, the simple way, and the one-size-fits all way of dealing with far-flung employee groups.  For many companies and international compensation practitioners it is actually the administrators whose resistance you have to overcome.

The headquarters staff will ask, what difference does it make?  Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way?  Here are a few metrics to illustrate what they wish to standardize:

• The value of jobs (price) irrespective of locale (same pay, just different currencies)

• The pay mix of base salary and incentives (80/20, 70/30, 60/40, etc.)

• Universal date pay increases (everyone’s performance is reviewed on the same date)

• Average pay increase percentages, regardless of local conditions

• Pay-for-performance vs. general adjustment increases (whose culture is it, anyway?)

Why Not?

That’s the easy way.  But why doesn’t one size fit all?  Why can’t you treat all employees in the same fashion – because they all belong to the same “XYZ Corporation,” right?  I would suggest that you consider the following before taking out that cookie cutter.

• Economy:  When you’re dealing with country-specific inflation rates that range from flat to 20%+, do you really want to offer the same percentage salary increases?  What if one country is suffering through a recession and sluggish recovery (US), while another remains relatively unscathed (Australia)?

• Culture: in some areas of the world job and income security needs command paramount interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion.  For example, while China has a very aggressive sales compensation environment, in India there is more interest in base salary and their CTC (cost-to-company) package than variable pay-at-risk compensation.

• Competition: companies react to the cost of labor, not so much the cost of living.  If the local market rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a non common practice approach risk lower employee engagement as well as a talent drain.

• Representation: National unions often dictate pay actions that could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.  Works Councils will have their impact as well.  It’s not unusual for management employees to receive increases based on what the national contract dictated for the rank-and-file.

On the other hand, varying your practices according to country-specific conditions could cause a degree of consternation with the back office staff and their computerized systems.  These are folks who like things neat and pretty.  In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

• Tabulating global statistics when definitions or methods vary

• Identifying global trends based on diverse conditions

• Balancing the impact of cross border movement

If you force international operating units to convert their practices to an uncommon format and methodology, the result could be more than just confusion and local administrative difficulties.  It could also mean the greater likelihood of over payments in some quarters while paying less in others – all for the sake of sameness and common report generation. This would offer up a damaging combination of employee inequities and additional expenses – both of which are not helpful to the company’s bottom line.

So it would be worthwhile to remember:  ease of administration is rarely an effective rationale for making good business decisions.

In recent months I have dealt with several US clients who faced an overseas challenge of high employee separations coupled with difficulties in recruiting qualified staff.   These companies were at a loss to understand the cause of their problems, as each felt that they were already paying out a great deal more in Total Rewards (compensation, benefits, etc.) for employees then they were accustomed to in the US.

A quick study revealed that, while the client’s international employees were indeed receiving a great deal more than their American counterparts, in many areas they were in fact being given no more than the minimum benefits mandated by statutory requirement.  How do you attract, motivate and retain quality staff when the message of your actions is that you are only willing to offer what the government says you must?

You don’t.

One client bemoaned having to grant four weeks of vacation upon hire, because it was the law in that particular country, only to find out that the normal practice granted five or more weeks.   By focusing on only statutory requirements and ignoring competitive practice they found themselves paying a steep price in struggling to build a quality staff.  They had also earned a reputation in the local market as a “minimalist employer”.

And like first impressions, a company’s reputation is hard to change.

Human Resources to the rescue?

When American companies first establish operations overseas Human Resources faces a number of challenges that they are unaccustomed to back at home.  Every country is a separate and unique entity, with differences in HR policies, practices and statutory requirements, each of which must be acknowledged and addressed in order to maintain a successful operation.   On top of that you will find that the myriad employment laws (little standardization here) is a major cost and operations consideration, both in complexity, strictness and required documentation.

In addition, you must deal with the vagaries of the competitive compensation marketplace, where the same job is paid differently from Rome to Oslo to Buenos Aires – usually coupled with social charges and benefit distinctions as well.

Operating under the guidance of U.S employment law and US-based corporate practices is a failed strategy.  Maintaining such a US focus (usually for ease of administration) will bring you grief; grief from your employees, from those you hope to hire, and most of all from local governments whose laws you have ignored or bypassed.

If you decide that your business strategy requires you to maintain a staff presence in a particular country, then I would advise you to treat that operation the way you would its US counterpart; provide competitive terms and conditions that will attract and retain the right caliber of employee in that country – and ignore how their reward packages might compare with US or other country counterparts.  If you are not willing to make that commitment, from an HR perspective you would be better off not to engage employees in that country.

I once supervised a Compensation Analyst who had spent a great deal of time attending professional seminars and workshops.  She had attended these instructional sessions to learn about Compensation, as part of her professional development.

One result of that education was a favored response when faced with a challenge at work; she would fall back on her class work experience by saying, “the greatest minds in Compensation say that . . . “.  It took a great deal of patience on my part to educate this part time practitioner / part time student in the difference between the classroom / textbook answer and the reality of the workplace.

A short while ago I came across an HR blog in which the author was instructing readers in how to create a merit performance matrix.  Very good stuff, I thought, admiring the technical step-by-step instructions, except I knew from long experience that the procedure being described would never work in the real world.  Didn’t the author realize that?

Yes, it is very important to understand the technical foundations of Compensation methodology and practice.   But first and foremost you need to anchor yourself in the real world, to know what will work and not work in your own organization, what will be accepted and what will be rejected – no matter what the finest minds in Compensation think.

So you ask, why doesn’t Compensation theory match with compensation reality in the workplace?

• Business realities:  management will typically know more about a particular business situation than you do.  What you are able to provide to the decision-making process as a Compensation professional is limited to your particular subject area, while management usually has the bigger picture – the perspective of multiple viewpoints. Your compensation advice may not fit their business reality, no matter how logical an argument you make.

• Bias of decision-makers:  decision-makers may feel that they intuitively know the right approach to take (they’ve done it before, if-it’s-not-broke-don’t-fix-it, a friend / relation / old college chum suggested an approach, etc.).  Perhaps they read an article just the other day and now are insistent to follow the advice of an author who doesn’t have a clue about their particular business.  Years ago I worked for a company whose CEO forced HR to implement a particular benefit plan because he had read a magazine article.  It does happen.

• Problem avoidance:  short of killing the messenger, one solution for management is to do nothing about a problem (you’ve exaggerated it, the solution costs too much, there’s still time, etc.).  Senior managers can be like politicians in avoiding the big decision unless and until it bites them in the leg.  Have a care, as it can be dangerous to your career if you try to force a decision.

• Business culture or model: some initiatives just don’t “fit” in your organization.  Managers with a laid back organization style will not be interested in recommendations to document everything, standardize policies and procedures and have approved forms for every possible use.  Picture your head banging against the wall.

Sometimes those subject matter experts who instruct in Compensation techniques fail to ground their instructions with a caution to their students;  check this process out in the reality of your workplace before you take a classroom or textbook technique and wave it in the face of management.

Two examples:

1)      Merit matrix:  when designing a pay-for-performance merit increase matrix the standard rule is to place the average increase percentage in the cell block most populated by employees (average performance and average position-in-range).   The sound reasoning for this technique is to better manage the costs associated with that year’s annual increase process.

A long time ago I followed that approach in my first compensation leadership role.  I still have a little bump where my head hit the wall.

Here’s the rub; such a technique requires that the matrix change every year, as the analysis demands that each year you study your population averages.  But management will likely have none of that.  They’ll want the same matrix every year, for ease of administration and communication.

2)      Cost of living as a basis for pay increases:  I once watched over a fascinating exchange on a Compensation bulletin board, where a debate raged on for several days.  The dispute was over the appropriate formulae to use for calculating the cost of living vs. cost or labor as it affected average pay increases that management would approve.  Each side of the argument provided formulae, charts and graphs and quotes from notable experts to press home their opinion.

The underlying reality behind this exchange is that management does not use the cost of living as a prime determinant in their decision-making.  They are more likely to roll their eyes at the technical debate and focus on competitiveness and bottom line cost (affordability) – and why can’t we do the same as we did last year?  If their ultimate decision relates to the cost of living in some way, that’s only a nice coincidence that they can use with their employee communications.

A skill-set that separates the compensation technician from the compensation professional is the ability to deal with what I call the “softer” side of compensation.  Survey statistics, charts and formulae are very good to a point, but management will want to know what it means and what to do about it.  So the answer isn’t simply reporting the data, but in taking that next step to help management understand and strategize their next move.

The contribution you can make to your organization is to blend your technical knowledge (the how-to) with seasoning and experience to understand what will work for your organization, considering culture and management bias.  Technical knowledge will give you the same answer every time, but knowing how to use that knowledge like a craftsman’s tool to aid in achieving business objectives – that is the key to success as a Compensation professional.

Have you ever found yourself in a situation where the competitive market price for your sales employees didn’t make sense?  Where the numbers didn’t add up?  Usually it’s the incentive piece that has you double-checking; you’re expecting an incentive value of 25% or 30% of base pay, and the survey reports much less.  How can you report those figures back to management?  Your credibility, as well as that of your data source, would be under serious question.

An uncomfortable feeling, isn’t it?

Management wants to see competitive total cash compensation.  At the end of the day what a reasonably performing sales employee should be paid.  How much should we be paying someone for hitting their quota figures? That total cash amount would include the incentive portion added to base salary.   But sometimes the market picture isn’t quite that clear.

A distorted view

Surveys typically report incentive amounts that were paid out, vs. a target or expected amount.  Which is okay, because the large amount of respondents within the survey tend to average out the better vs. weaker performers (high incentive payments vs. low) to present a reasonable approximation of target.  Which in turn is helpful when comparing your company targets against market realities.

However, to find a useful incentive figure presumes that the respondent payments represent an overall average.  And nine times out of ten that presumption is valid.  For sales jobs though, there is the likelihood that a much broader swing of actual payments would depress the average payment figure to something less than what the plan designers had intended.  Employees receiving little or no incentive would be counted along with those who have hammered their plans and received very generous awards.  The survey will report zero incentive payments in the results.

This creates a distortion, effectively low balling average incentive compensation (and total comp), as well as altering the view of competitive marketplace incentive targets.  This scenario is especially problematic when the sampling of participating companies is more scant than robust.

For example, if your sales job pays 40% of base salary for on-target performance, you would be somewhat concerned to see that the market reports a 20% incentive being paid for a well matched comparison.

Now look to your own organization.  How many of your sales employees achieve 100% target?  Does your average payment (including all sales employees) approximate the target payment percentage from the sales compensation design?  Likely your own number is markedly less.  If it’s not, then perhaps your sales targets are too easily achieved.

This reporting situation is made more awkward (to explain) when instead of a compensation analyst it’s a wannabe HR generalist flipping pages through a survey and writing down as gospel whatever number they find.

So what is a survey user to do?

Be careful to check whether your survey source(s) is reporting paid incentive, target incentive, or both.  When using multiple surveys remember that blending target amounts with actual paid incentives (which may be unavoidable, based on survey formatting) may distort your results, at least somewhat.

So if the results you get look a bit squirrely, you need to use a little common sense before making any competitive pronouncements.  The same sense you would use when reading results from a good year’s performance (economy flying high) vs. bad results (the great recession).  Both can distort how the market relates to your plan design and target total cash.

You might wish to factor in an adjustment percentage (5% or 10%) when assessing market results against your plan design target.  To counterbalance the impact of the zero payments.

Or leave it alone, but don’t forget to tell (and periodically remind) management that the incentive cash figures for sales employees are likely lower than what your own organization is experiencing – and what are common practice plan designs.

So have a care when market pricing your sales staff.  And keep an open eye on whether the sales job incentive figures make sense.

It used to be a common view that the Human Resources department in large companies was more sophisticated, more professional, and more forward-thinking than what you would expect to find from HR in smaller companies.

We all presumed that the “big guys” knew what they were doing.

But current thinking among some practitioners now challenge that presumption.

The pendulum of thought has begun to swing the other way.  Indeed, sophisticated has become cumbersome, professional has become bureaucratic and forward-thinking has created a chasm of credibility between philosophical concepts and the practical realities that managers deal with every day.

Remember the K-I-S-S principle (keep it simple, stupid)?  Many large organizations seem to have forgotten that common sense caution as they saddled their reward programs with ever more forms, procedures and bureaucracy.

The Evolution of Performance Appraisal

A good example of HR systems gone wild is the difference between a small company performance appraisal and the convoluted processes often followed by large companies.  Herein lies a stark contrast not only of styles but of methodologies and core beliefs that a more complex better way will increase the effectiveness of employee reward programs.

This growth of complexity is commonplace; by the time an organization achieves a certain population size HR feels compelled to complicate their processes – usually in the name of increased employee sensitivities and streamlined procedures.  What worked well before (when the business was smaller) is suddenly suspect, deemed somehow less effective, less desirable.

What began as direct cause and effect, performance followed by assessment = reward, suddenly becomes much more complex, more confusing to some, more aggravating to others.  Communication becomes critical but is often flawed and ineffective as both employees and managers question the additional complexity.

What follows is a brief comparison between how small and large companies approach the critically important performance appraisal process.

The Small Company Experience:

• The employee’s performance is assessed against what is expected of them.

• Performance discussions usually take place on the anniversary of either employment or promotion.

• Forms are basic, even simple.  They may not be standardized, and one or two pages are usually enough.

• The process doesn’t take a lot of time.  Meetings tend to be short and focused, so both parties can get back to work.

• What the boss says is what is going to happen.  The approval chain is abbreviated; messages from the performance meeting are typically what actually happens.

• The money discussion (pay increase) is front and center, a cause-and-effect dialogue.  You have performed thus and so, and your salary will be changed from “x” to “y.”

How Large Companies Tend to Operate:

• The employee’s performance may be assessed against other employee’s, as much as against what is expected of them (based on their job description).

• Performance discussions use a Focal Point strategy, where everybody is reviewed at the same time.  For managers with more than two or three subordinates, this represents a challenge in terms of time spent and quality of assessments.

• Managers are often required to use intricate, multi-part, multi-page forms designed by a specialty section within HR.

• Employee performance as a group may be viewed against a desired bell-shaped curve of results.  Individual assessments may later be modified to fit the expected / budgeted shape of the curve.

• The boss makes upward “recommendations,”  which may or may not be approved.  Thus, the conversation with the employee ends on a “we’ll see” basis where money is concerned.

• Other topics like developing future performance, improvement strategies / action plans, and “where are we going?” discussions may predominate.  Sometimes talk of a pay is deferred, raising the question of whether performance actually relates to reward.   Meanwhile, the employee wants to hear about a raise.

• Employees could feel lost in the bureaucracy, a faceless ID number trapped within a huge spreadsheet.  For them, cause and effect becomes a pep rally concept, with little connection between individual performance and reward.

So what has been lost as the organization grew larger?  Has it become more impersonal, forms-centric, process controlled, and standardized?  And is that better than before?  Perhaps more has been lost than gained.

How did the organization evolve itself into something potentially less helpful, less effective?  Perhaps the poking and prodding of systems and procedures in the name of improvement went too far, until they created a convoluted and twisted version of their desired state.

Perhaps we’ve let specialists over analyze the psychology of a boss rewarding a good performer.  We’ve exchanged hard decisions with real impact for a muted “everyone deserves something” approach.  The following scenario is common.

• Sub-function specialty groups are created within HR, be they Training, Management Development, Succession Planning or a host of others popularized in prevailing industry jargon.  Each group has advocates that push an agenda of change.

• These specialty groups must justify their existence, to validate the worth of their profession, and their mission.  The result is additional layers of forms, procedures and extra time constraints for managers to struggle with.

• Over time these experts lose sight of the managers they should be trying to help.  They don’t understand the beast they’re trying to tame.  By pressing their own agenda they tell management how to assess performance.

• Ultimately these groups become blockers, getting in the way of a smooth-running operation.  Objecting managers tend to respond with a campaign of passive resistance.

So can we make our large companies “feel” smaller when dealing with employees?  How do we reverse the model of increasing complexity and confusion?

When the state of affairs has gone off the tracks, how many times have you heard – or used the phrase, “let’s get back to basics?”

Perhaps that thought could be useful today, no matter what size organization you hail from.  Simply return to the fundamentals of performance management, where performance is assessed, which in turn leads to reward.

It doesn’t have to be any more complicated than that.

K-I-S-S

Are the employees in your organization informed of their salary grade, or of the minimum, midpoint and maximum values of their salary range?  Do they know where their job stands in the company’s hierarchy (mine is bigger than “x,” but smaller than “y”)?   In effect, do they know how they and their job are being viewed by the company’s compensation program?

If they don’t, why not?

Is this privileged information, tightly held by Human Resources and only doled out in small drips, when asked?

Is it a secret?

Some companies don’t tell an employee their grade or salary range; or if they do, that’s all they give – the employee’s present status as a single, unrelated piece of information within a huge jigsaw puzzle.  In such a case the employee is unable to find out the grade or salary range of any job other than their own.  Without a frame of reference, such a restricted disclosure is not very helpful in planning that next career move.

Employees also won’t know if they’re being treated fairly.

Limitations on disclosure are strictly for the benefit of the company.  No one will say that the employees don’t want to know, or that such information isn’t important.  Instead,  reluctance to disclose is inherently a management decision meant to advance tactical considerations in support  of their own agenda.  In other words, it helps management freedom of action when employees are kept in the dark.

But what’s such a bad idea with informing employees about the broader compensation structure, to let them know where they stand within the organization?

• Unless there’s something to hide

• Something the employee should not discover

• Some policy or practice that cannot be defended

Given these potential cautions, while the concept of open disclosure often gets the heads nodding as a grand idea, negative practical implications may point in the opposite direction.  It’s the old “but not for us” ploy.

What could go wrong?

When the pay structure is posted on the wall for the first time, there for everyone to have a look-see, the phones will start to ring.   That signals the start of the “what about me?” questions.   Let’s look at a few common scenarios that managers would dearly love to avoid hearing about.

• If the midpoint is 100 and the employee is at the minimum, say 80 (-20%), even after five years of good performance reviews, how does the manager explain that?

• Why is that job (point at anyone) in a grade higher than mine?  No manager wants to defend job evaluation results, especially as it’s an inherently subjective process.

• Why is the job I want to bid on only a lateral move for me?

• If my job is so important (manager said so), then why is “job x” in the same grade?

Management doesn’t want to get these calls, because often times they’re woefully unprepared to answer the employee’s questions.   And they want to be liked, to have someone else be blamed.  So wouldn’t it be easier if the employee just didn’t know?  Wouldn’t it be easier to operate the business with employees left in the dark about their grade and salary range status, rather than face potentially awkward questions out in the light?

It does make sense, but for who?

How many of you reading this article have a piece of paper that you can lay your hands on, one with the title, “Compensation Strategy”?  Or, do you know if such a document exists in your organization?

The common response at this point is usually a blank look.  But why is that?  If paying employees is the single largest expense item for most organizations, why don’t they have a plan to manage it?

Because that’s what a strategy is, – a plan of action, a guideline or directional map that lays down a series of principles to be acted upon.  A plan helps you avoid the “let’s try this and see what happens” tactic.

Look around you; if Marketing has a plan, as well as Manufacturing and Finance, and of course you have the Corporate plan – then why not a plan that encompasses how to spend a lion’s share of the organization’s money?

Of course, when prodded a bit, most do seem to come up with an answer to my question – though they often sound reactionary, if not defensive.

• “We already have a Mission Statement.” But broad, aspirational phrases like “market leader,” “shareholder value,” “supplier of choice,” etc. are little more than a series of vague terms and buzz phrases meant to capture media attention.  There is no meat here.

• “We know what we want to do.” As if the plan for effectively and efficiently spending the organization’s money is somehow intuitive – that everybody knows it.  Sort of like a secret plan.

• “We use our annual objectives.” A claim that annual organization or department objectives are in fact the strategy – offers little more than short sighted thinking often vulnerable to swings in corporate focus.

So what we’re often left with are excuses, not effective responses.

The importance of strategy

Then what should be the focus of a compensation strategy?  And why is it helpful for an organization to lay down a tactical plan, a well-considered outline for present and future action?  Because . . . .

• It provides specific, motivating direction.  Having a plan establishes a pathway for action – for what you intend to do – and it helps point everyone in the same direction

• It helps guide and engage the workforce. Telling employees what you believe in, and how you intend to convert those beliefs into concrete action always pays dividends in the court of employee opinion.

• It identifies the focal points. It focuses attention on key program design elements (such as competitiveness, specific marketplace, pay-for-performance, cost sharing, etc.)

• It helps leverage the company investment in people. It makes a commitment to employees regarding how they will be treated, thus elevating their worth as a true asset important to organization success.

• It brands the company in a positive light and helps recruit talent. A compensation plan provides an opportunity for the organization to identify itself in a way that attracts potential employees.

So, if one accepts the importance of a plan for controlling costs and managing the effective and efficient use of payroll dollars, what are the barriers that stand in the way?

• Senior leadership disagreement. Lack of consensus over what to say (broad vs. focused, basic Compensation vs. Total Rewards, commitments vs. aspiration, etc.) stymies progress as the debate could take on a life of its own

• Vaguely worded messages.  Using generic phrases that are vague and meaningless, which don’t differentiate you from any other organization, or puffery and “mom and apple pie” phrases that sound great but mean little

• Ineffective communications.  Fears of raising employee expectations, high brow corporate-speak messages that employees ignore, and cultural insensitivities on a global playing field all serve as minefields for the unwary.  These are usually compounded when the message is prepared by professional writers little versed in the subject matter.

What if you do without?

Sounds like a lot of trouble, doesn’t it?  So why not do without?  Others have; so could you.

Which would then leave your single largest expense – employee pay – without a guiding principle, without a plan to ensure that such a large amount of money is spent in an effective and efficient manner.  Money would be wasted, like a steadily dripping faucet  – or a flood if you’re not careful.

Without a standard universal message the risk of multiple messages rapidly increases.  The information being communicated gets confused, blurred and often at odds between the messengers themselves.  Plenty of room then for inconsistent and inequitable treatment.

You would see your employee costs rise as a direct result of a no-plan environment.  Because the vacuum left by not having a plan will be filled by multiple pay practices that lack consistency, standards and internal equity.  Squeaky wheels and political insiders will be favored.

This is not for the faint of heart

Developing a compensation strategy is not an easy process, and even the strongest advocate would acknowledge the challenges to be faced.

First of all, building a consensus philosophy and message among senior management is a difficult, and often time consuming endeavor.

You should also expect a degree of passive resistance from naysayers and supporters of the status quo.  Or from anyone else who would benefit from your failure.

So in order to push the project across the finish line you will need the active support of senior management.  This doesn’t mean the lip service memo authored by professional writers, or even a brief appearance at a kick-off project meeting.  Organization leadership needs to be seen as effectively leading, pushing this initiative, walking the talk, so to speak.  The strategy needs to have a highly placed sponsor, one whose support is visible and easily heard.

And you will have to keep at it, too.  Monitoring adherence, updating as necessary and constantly reviewing that policy, procedures and practices remain in sync, mutually supportive and offering employees a consistent message is no small task.

It’s a lot of work, but worth it for the organization and the employees.

Does changing a light bulb make you an electrician?  Or does replacing your car’s oil make you an auto mechanic?

No?  When it comes to Human Resources, though – that can be a different story.

For many an HR generalist working in a smallish company the role of Compensation is essentially one of market pricing.  They want to know how much a job is worth out there in the marketplace.  Nothing fancy, nothing complicated, just answer the question – how much?  Given the easy access to survey information these days (the good, the bad and the ugly), many HR Managers tend to diminish the significance of compensation analysis with a shrug of the shoulders and a smug, “oh, we can do that.”

To their view, market pricing is a simple process of matching a job description (as available) to a generic, boiled down paragraph from a survey source, then noting the highlighted figure that corresponds to that job.  How difficult is that?  Piece of cake.

How bad can it get, they figure, asking an HR generalist or even a department manager to flip the pages of the survey to find the “going rate”?  Are they going to be that far off?

Yes, they can.  Yes, they will.

Now I admit to having a bit of a bias, but consider this:

• Survey complexity has been increasing, as customers demand ever greater degrees of “slice and dice” data analysis / market segmentation (your industry, your revenue, your geography, etc.)

• Surveys no longer provide just “the number,” but many figures to choose from.  Which is best for you?

• The HR Generalist already has a full time job, and not a lot of time to spend dabbling in the intricacies of market pricing.  They’re looking for the quick answer.  Does quick suit your needs?

• The periodic dabblers may also be affected by their own biases (they know the job holder) and a simplified grasp of the job under study (relying on title matches and / or abbreviated “descriptions”)

• What happens when a critical job isn’t perfectly matched in the survey?  Do you check off “no match” and move on?  What if you really need the data?  Is your ad hoc analyst able to triangulate other jobs into a reasonable assumption of the needed market rate?

• If you’re dealing with international jobs, there are a host of limitations on available data not commonly experienced in the US.  Market pricing overseas can become more of an art than a science.

The risk is in misreading relationships between jobs, where a wrong job match or an out-of-context figure could become the single domino that starts a chain of distortions.

If a job evaluation system is being used, one can readily see the relationships that exist between jobs.  So if a mistake is made with a Systems Analyst, likely that error will be compounded when coming up with the Senior Systems Analyst figure.  And if you’ve historically considered a Financial Analyst similar in value to the Systems Analyst, you can easily peg the Financial Analyst to the wrong market rate.  And so the story goes, for as far as you consider other jobs of equal value.

But perhaps the greatest challenge to the wannabe analyst is when they are challenged by two commonly asked questions.

• Are you sure of these figures? In other words, defend them as if they were your own creation.  What survey(s) did you use, who are the participants, did you properly match the job, let me see the data, etc.

• What do we do now? Having the data is usually the tip of the problem, and like an iceberg there’s always a lot more behind it.  How do we take the knowledge of competitive market pricing and develop tactical strategies to move the organization from a problem zone to safer ground?

So have a care when thinking of flipping pages through a survey, or clicking through an internet source.  The numbers can trip you up, even as you don’t know what to do with what you have.

Remember when you need an electrician, and when you don’t.