"Best" Practices: For Who? When?
There is no strategy, program or magic trick that works well in all contexts at all times
Fads begin when a shiny new thing is said to resolve all issues for all organizations at all times. Adopters failing to realize that the literature and presentations at conferences are only about successes jump on board without considering one reality. The practices that failed never get broadcasted, since it is not career enhancing to disclose one’s mistakes. Even academic literature is biased, since reviewers do not publish studies with results that did not support the hypothesis.?
Performance management has seen its share of shiny new things: stop doing appraisals… stop using ratings…tell managers to do periodic “check-ins” rather than continuously measuring performance and providing feedback. Compensation management has also experienced many fads that fizzled or that do not fit the current context of the organization considering adoption: broad-banding…competency-based pay…longevity-based pay… cost of living increases.
Adopting what successful competitors for talent do is not totally irrational. If a strategy or program results in critical skills being stolen by other organizations serious consideration should be given to emulating that practice. Yet that may not be possible. Silicon Valley firms have been successful in using stock-based programs that are not available to other organizations to attract talent. When consulting with several national research labs in the Bay area we found highly capable scientists would sometimes leave for the prospect of significant wealth in the short-term. Since the contractors managing the labs were not able to use stock-based plans other strategies were mandated. One counter to the prospect of rewards that far exceeded what the labs could offer was to stress the meaningful work done there. For some discovering new knowledge and advancing science was more satisfying than producing software for version 15 of an existing package. It was also possible to point out that the vagaries of the venture capital world meant the illusion of current wealth only existed on paper and that it may disappear due to outside forces. Individuals have no control over the behavior of the stock market. Some people do not want their careers to be like continuous visits to casinos.
Where something might work.
Benchmarking against practices in other organizations is a way to assess the competitiveness and attractiveness of the current value proposition being offered. Salary surveys can identify prevailing market rates for occupations. Benefit packages can be evaluated against those of direct talent competitors. But the fundamental principle underlying sound benchmarking is that what worked “there” can only be expected to work “here” in the same way if the contexts are similar.
The realities faced by a public sector agency often differ from those in the private sector. Budgets determined by legislatures or other political bodies are less flexible than those determined by private sector management. Start-up firms may not be able to commit to competitive base pay levels or rich benefit packages and might use incentive programs or equity to enhance their value proposition. Organizations with a culture that favors egalitarian programs rather than competitive ones might find “winner takes all” incentives less effective.?
When something might work
Another consideration is whether any practice will always have the same results in the same organization. Offering very high salaries and signing bonuses might have worked for Amazon when the pandemic arrived, since surges in revenues provided the resources to fund them. When revenues subsequently dropped the only alternative was staff reductions. Relying heavily on stock options to offset employment uncertainty and modest pay and benefits may work in a firm’s start-up phase but may lose its appeal when the value of options varies wildly. Mortgage lending officers do not consider the potential of future riches when current income does not support the loan.
Should changes be considered?
Inertia can preclude continuous evaluation of current strategies. When no immediate crisis is apparent it is unlikely that the consideration of major changes will seem necessary. But assuming the context within which strategies and programs are administered will not change is questionable, especially in environments like those that have existed over the last few years. If changes that make a program less effective are expected to be short-term it may not be smart to modify a pay program that might be the best choice over the longer term.?
The surge of inflation in the aftermath of the pandemic caught many organizations off guard. When 3% has been budgeted for base pay increases and inflation surges to 7% employees are likely to notice their real income has been affected. A trip to the gas station, restocking in a grocery store of paying a utility bill can produce pressure for the employer to “make us whole.” Some response beyond a claim that “this too shall pass” is warranted.?
One option would be to increase the budget to 7%. Although attractive at the time, when inflation dropped to 2-3% it looks less rational. Fixed cost payroll has been permanently increased to what might be an unsustainable level in the future… there are no refunds. It also informs employees that they are entitled each year to receive either the cost of living or the cost of labor, whichever is higher. Over the last five decades the cost of labor has risen about 50% more than the cost of living, which means real income has increased by 1% per year on average. But if an employer grants the higher of the two measures each year fixed cost payroll will skyrocket.
Another option is to augment the base pay plan with a contingent inflation offset plan. For example, if pay increases are based on the cost of labor surges in the cost of living could be accommodated by one-time cash awards. Although this still incurs an expense, it is a conditional one-time award and it does not inflate fixed cost payroll permanently. The plan may also allocate a fund in a manner that recognizes employees at lower pay levels are being impacted more significantly by inflation. One approach would be to establish a fund as a % of payroll (in this case 3-4% which would close the gap) and award each employee the same dollar amount.?
Limitations imposed by the context
Pay programs for employees in a collective bargaining unit are negotiated. Even when current costs prove to be inapropriate at a given point in time the latitude for management is limited. Convincing union leadership to consider program features that are more effective from a business perspective is often challenging, as is gaining member approval.??
When pay actions are prescribed by an automatic, time-based step-rate progression system there is a limit on flexibility. The GS system covering many federal employees has been called a “pay for aging” system since neither competence nor performance impact pay actions. This type of system can send the message that performance is not important, thereby appealing the least to those who are willing and able to contribute the most. When President Obama attempted to freeze federal employee pay during the economic crisis, he could only freeze the step schedule for two years. Employees still received step increases, which raised questions among the taxpayers funding the increases, especially when they were not receiving increases or losing their jobs. The negative aspects of this type of system have resulted in a significant portion of federal employees being taken out of the GS system and placed in “excepted service” plans. The obstacles to removal are significant… Congressional approval must be sought.
Conclusion
Continuously evaluating current philosophies, strategies, programs, policies and practices is necessary to ensure they remain viable in the current context within which they are used.
Comparisons with talent competitors are necessary to ensure an organization can attract and retain the people it needs to succeed.
Emulating the practices of others without evaluating the impact of context can result in importing practices that are failures, due to a lack of fit to the context.
?About the Author:
Dr. Robert J. Greene is an expert in human resource management, serving as the CEO of Reward Systems, Inc., Consulting Principal at Pontifex, and faculty member for DePaul University’s MSHR and MBA programs. A well-respected global speaker and educator, Greene has a passion for empowering organizations to thrive by unlocking the full potential of their people. He has authored four books and hundreds of influential articles and is an advocate of using scientifically valid research to make the business literature more responsible and less tainted by opinions that are only speculative and that encourage fad adoption.
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