Attracting & Retaining Talent With The Right Compensation Strategy
Most people would prefer more compensation.? Although some have said money can not buy happiness it can buy things, some of which are considered necessities (e,g., food and housing).? Receiving a large increase to one’s base pay rate can be a source of satisfaction, and perhaps even motivation.? If the increase is larger than “average” it can be a signal that a person’s contributions are valued. The amount of compensation received acts as a metric, and even though it may not be the most valued thing an employee derives from what (s)he does, it is likely to be one of the most important.
But not all forms of compensation have the same value to everyone. An executive with a high level of current income may prefer something other than current cash if the tax treatment is better.? Employees who are still establishing their standard of living might prefer cash income over stock options or grants. An employee with a young, growing family may prefer better health care coverage than something else.? Some will prefer more time off over something with an equal economic value.? So “more” may mean more after-tax perceived value.?
As organizations struggle to compete for talent in labor markets destabilized by the pandemic, they attempt to offer value propositions that will be attractive to the people they need. Spending the available funds on things that will appeal the most can produce a competitive advantage. Some organizations have the advantage of doing things that people want to do, whether that is meaningful work that contributes to the well-being of others or dealing with leading-edge technology. Emphasizing strengths and minimizing weaknesses is a good approach so the communication strategy should be designed to do that.
We did a research study at a consulting firm I worked for that offered large groups of employees a number of options that had an equal after-tax economic cost to an organization. Based on employee preferences it was possible to determine their preferences. We discovered that some options, like improved AD&D coverage or a larger life insurance benefit, ranked low. Follow-up interviews established that employees felt they already had adequate coverage, making “more” not very attractive, at least on a relative basis.? This seemed to make a strong case for flexible benefit programs, which enable employees to trade something they do not value highly for something else that better suits their current needs.? Technology has made it inexpensive and easy to do and research establishes that employees find flexibility to be very attractive. Workforce diversity argues against one set compensation package for all.
Compensation is one of the elements of the employer value proposition. When someone is trying to choose between multiple job offers several factors may be considered: starting pay rate, benefits, type of job (even the title), nature of the work, reputation of the organization, what the organization does (is it green or does it ravage the environment), incentive opportunity, career opportunity, location and terms of employment. It is increasingly common for people with skills in demand to prefer an arrangement that does not involve becoming an employee.? Consultants, contractors and freelancers are doing more work and they do not want to work for organizations, even though they want to do work for organizations.? One of their conditions of employment might be no employment!
There are a number of characteristics that make an organization and a role attractive and those wishing to maximize perceived value should consider the following when selecting one:
Select a high-paying organization: there are organizations that attempt to pay more than competitor organizations, usually based on the belief that this increases the quality of people and the probability that the right people will join and stay with the organization. The ability to execute this strategy is impacted by its capital – people mix in the organization’s operating costs.? A bank is likely to have the majority of its controllable costs in the form of people costs, while a refinery may have less than 5% of costs allocated to pay and benefits. As a result, capital intensive organizations tend to pay more… because they can, without dramatically increasing costs.? A refinery deciding to pay 15% over market would have an insignificant impact on total operating costs, whereas a bank would find it unaffordable.
Select an organization that places a high value on what the person has to offer: organizations identify occupations that are central to their primary mission and critical to their performance and value those occupations highly. A software designer will find that an organization that designs and sells software probably places his or her skills at the top of the food chain… a hospital probably does not.? When decisions about how to allocate salary budgets are made the “central and critical” occupations are probably going to do better than those that are necessary but not as highly valued. A software firm is going to be more concerned about losing a top designer to a competitor than losing an accountant.? Since the organization competes principally on having the best software and not the best accounting statements this is understandable.?
Select an organization with a “good fit” culture: people will be concerned about the degree of fit between their beliefs, values and needs and those of the organization.? Those who prefer to build things and stay around to maintain them are more apt to feel comfortable with an organization that does not churn their workforce quickly.? It is widely believed that those working for public sector or not-for-profit organizations may be more likely to be there for their career than those employed in the private sector.? That is likely to be an over-generalization, although the nature of the work is such that it may be the case.? This can be partly explained by the reality that pension plans and longevity-based pay plans are still common in the public sector (though they are becoming less so), while being almost extinct in the private sector. The degree to which performance impacts compensation is also an element of “fit” between the person and the organization.? Employers utilizing a large component of variable compensation, based on organizational performance, expect employees to accept that their current income will vary from year to year, even though the result may not reflect individual performance.? If individual incentives are a big part of the total compensation package someone who is confident of their ability and willing to extend maximum effort is likely to view that as appropriate.? Using time-based pay progression systems will tend to appeal the least to top performers, so an organization using that type of system is probably not the best choice for those who are willing and able to contribute at high levels.?
Bargain hard during the negotiations to determine starting compensation level: there is a range of starting pay that an organization will use to determine where an individual hire will fit in that range.? The last decade has been a time when budgets for pay increases have been far below historic averages… until the pandemic destabilized the labor markets.? Now there is uncertainty about how long inflation will remain high and whether competitive pay levels will increase at a much higher rate. Prior to the outbreak organizations struggled to find the funds to move employees through the established pay structure. Since pay ranges are most frequently 50% wide someone starting at a rate that is low in the range will probably be there for some time.? When budgets only exceed the movement of pay ranges by 1- 2% it is difficult to move employees up in the range. In many organizations top performers were taking 8 -10 years to reach range midpoint (which represents the competitive rate for competent incumbents who perform adequately) if they start at a rate low in the range.?
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Recently I consulted with a large county and discovered 92% of their people were in the bottom one-third of their pay ranges. As candidates for employment were interviewed the start rates they demanded would have “leapfrogged” them ahead of employees who had several years of service. This is currently an issue that has become widespread and there is no easy answer that does not require increased payroll costs.?
Be a “good citizen” but stand up for what one believes: the perception a manager has of an employee will be impacted by the balance between initiative and dissent.? When an employee identifies policies or practices that are deemed sub-optimal the way that person expresses the need for change will impact the perceptions of those who appraise contribution and determine performance.? Persistent complaints about things that are wrong, especially when they do not have a major impact on performance, will cause an employee to be viewed as more adept at complaining then at offering ideas for improved operations. The adage “pick your battles” is generally wise counsel.? But a “go along to get along” modus operandi may not result in the person being highly valued either.? If an employee always offers a potential fix whenever a defect is pointed out that person is apt to be treated more positively when pay actions are determined.
Always have a “Plan B”: conditions change, and when someone has not given any thought to alternative employment options it is more difficult to be prepared for a time when pay is viewed as inadequate and there is no prospect of change. Continuously scanning outside opportunities is not being disloyal to the employer… it is a way to determine whether the current situation is in the person’s best interests.? When the organization is going through difficult times there is apt to be a limit to the funds available for compensation, and there may be an increased probability that staffing levels will have to be reduced.? And when the organization decides to do different things, they may need a different type of talent. The most dramatic change is when one’s knowledge and skills become obsolete, due to infusion of technology.? Typesetters were displaced in large numbers when newspapers shifted to computerized front-end systems. Today there are an increasing number of occupations that are subject to algorithms replacing people or reducing the number of people needed. Life-long learning is a pre-requisite for survival in a dynamic environment and refusing to “go back to school” may destine one to uncertain income levels in the future.? The pandemic has lowered the quality of work life in the minds of many, and this is a formula for frustration and discontent. Surveys suggest some people are leaving their employer because they blame the changed working conditions (e.g., having to work alone) on the organization. The trigger may be nothing more than having to work in a silent setting with no social contract except what can be achieved by staring at screens.
Plan For The Best, The Worst and the Most Likely
Scenario-based planning is a tool that organizations can use to select strategies that will work well in a range of possible futures.? Given the dynamic environment it is necessary to plan even when predictions are difficult.? Each individual should continuously scan the environment for changes that are likely to impact employability and compensation.? If threats are detected steps should be taken to cope with their probable impact.? Being honest about whether one’s skills and knowledge will continue to be valued can result in identifying a need to refine/replace skills.? Not everyone has to become a data scientist but if analytics are becoming an important part of what one does then it is prudent to acquire the necessary skills and knowledge to remain competent and in demand.
The factors impacting pay satisfaction have not fundamentally changed, but the turbulent environment has destabilized labor markets. Employers must attempt to understand the perspectives of their employees and the wants of potential candidates and respond with the compensation strategy that is most likely to be effective.
About the Author:?Robert Greene, PhD, is CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene?speaks and teaches globally? on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.