Overcoming Pay Complacency

December 22, 2014

Our last blog discussed why company pay policies had become stale and were ceasing to be an influence on behavior. We reviewed the causes, specifically the over reliance on market benchmarking. We now examine how compensation practice needs to change to become once more relevant in delivering strategy, reinforcing culture and motivating consistent performance. 

Even big companies fall prey to pay complacency; a mining client's Board had told senior managers for years that the market rewarded performance which in turn would drive share price and the value of their options. Upon analysis share price movement correlated almost exactly with the price of the company's primary mineral. Management attempted to motivate behavior in one direction but compensation drove it in another - pay wasn't aligned with strategy affecting value and engagement.

The approach below,  is less concerned with executive pay and more with that of general employees and will align your pay practices to support your strategy by motivating intended behaviors:

  1. Bottom's Up - low pay inflation means that budgets rarely break 3% and companies add the prescribed amount to ranges with a similar adjustment to budget - a simple, top down approach. Try to follow a bottom's up approach for this year's review. Ensure ranges reflect how you value work and whether similar sized jobs in different functions continue to sit comfortably in the same range. Examine outliers and assess whether re-grading is necessary, make sure that the majority of people are sitting plus or minus 10 to 15% of the midpoint and if they are not find out why. After a few years of top down management pay ranges can become misaligned and cease to support the way that you have communicated how they will work.
  2. Job Evaluation Factors - how do you value work today and does it continue to align with your culture and values. Culture evolves and the importance that you place on behavioral traits today may have changed  from when ranges were developed. Employee engagement for example has become far more sophisticated than even several years ago. Companies that place a high value on "Customer Service" often include it as a JE factor for those positions with significant responsibility for embedding it in the business. A few years later and that task may have been completed and now every position carries an expectation and a role to play in responding to customers. The purist might argue that this is a behavior and expectations articulated in a job descriptions may impede initiative. A valid concern, so include minimum standards to encourage and reward differentiated behavior.
  3. Break the COL (Cost of Living) Cycle - many companies have gotten into the spiral of awarding pay increases in line with inflation or the general costs of living and for most this represents their entire pay budget. Once started it's tough to stop; expectation and entitlement has been established. But a moment of reflection will reveal that a time of low inflation is the ideal time to do so. With inflation so low will a general adjustment be missed and after all are you able to pass this on every year in product price increases. Launching a new approach with emphasis on performance and promotion awards and abandoning the ritual cost of living award will be welcomed by superior performers.
  4. Evaluate Behavioral Incentives - compare the role that annual salary increases and annual incentives' play in driving performance. Look at the type and size of the metrics that are measured to trigger awards and confirm that they reward exhibition of the values that the organization is promoting through employee engagement. For example, a deferred incentive plan puts distance between the performance and the award. This may not match an objective of "in the moment" performance feedback.  A metrics driven formula may stifle creativity and innovative behavior for fear of losing out on compensation - if there is a conflict employees will follow the money and your business may have lost an opportunity to create value. This is not say that objectivity should be abandoned and a return to subjective incentives be embraced be embraced but calculate how far the current incentive framework can take the business and whether there is sufficient reward and incentive for creativity 
  5. Market Matching - the primary method of managing pay for the last few years has been by comparison to market. This is a destructive trend and further limits the use of scarce dollars in the pay increase budget. During low inflation annual matching is not necessary - big consulting will not agree by the way, as they want to lock you into paying for and supplying data to their surveys. Break this habit, save the money and focus limited dollars on performance - retention is not going to be influenced by small changes in market movement or the absence of an annual market match.

A return to significant increases in pay inflation are still some years away - but they will return as the talent supply dries up when the boomers leave the workplace - in the meantime, get your pay structure fundamentals supporting strategy and incenting the behaviors that you want to see from your workforce. Turn these scarce dollars into a hard working resource and clean up the effects of years of pay complacency.  

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