Compensation Strategy: Execution Is Harder Than Formulation

An organization’s compensation strategy should contribute to workforce effectiveness, thereby positively impacting organizational performance. Yet the strategy should be a good fit to each organization’s context. What works well for others may not be effective in a different environment, due to contextual differences and management choices about how to achieve the organization’s objectives.

The most common strategy commits an organization to rewarding employees competitively, equitably and appropriately. The difficult part is figuring out the “how.” Having employees accept how the strategy is executed can be equally difficult.?

Affordability. A pre-requisite for strategy feasibility is affordability. If an organization cannot afford to pay what talent competitors do, then alternative tactics must be developed. For example, a bank cannot compete for administrative personnel with a refinery. People costs represent a major portion of a bank’s controllable operating costs, while they are less than 5% of a refinery’s costs. Being capital intensive gives the refinery an edge in a talent war. When a bank attempts to pay “competitively” it must decide “competitive with who?”?

An organization heavily dependent on talent to succeed may decide to pay above market (assuming it is affordable), thinking that will result in attracting and retaining a higher quality of employee. Even though research does not strongly support that belief it still might be effective when shortages of critical skills is impacting the organization’s performance. The impact of this strategy will also depend on how attractive the overall value proposition the organization offers is.

A compensation philosophy must define the criteria used to make decisions, which will impact the strategy selected. The principle underlying pay rate administration is that pay rates should be a function of the value or a person’s role (internal and external), their competence in the role and their performance in the role… personal characteristics should not influence rate determination. But this means employees must accept the values placed on roles, how competence is determined and how performance is measured if they are going to believe equity exists.?

Equity across roles. A dilemma often exists when the organization must reconcile the external and internal value of roles. An example of a challenge is an organization attempting to compensate engineers from different disciplines. Decades of consulting with national research labs has made me appreciate how difficult it is to gain employee acceptance of the way a lab administers the relative compensation levels for Electrical, Mechanical, Nuclear, Facilities, Civil, Environmental and Computer Engineers. Due to changes in the impact of technological developments and in the criticality of each discipline to employers the competitive compensation relationships between differing specialties has caused levels to vary over time. The supply and demand conditions will have a short-term impact. An organization may respond to short-term variations in market value and maintain the same pay structures across disciplines by allocating budgets for pay actions differently. Even though this may raise equity issues among incumbents of the disciplines receiving smaller adjustments in one or two years it can provide a way to sustain appropriate relationships between disciplines over time. Cyber security and AI are disciplines that currently are in the spotlight and employers must decide how to compete for the talent required without sacrificing acceptance by employees in other disciplines that the differences are necessary.

Equity across individuals. Having employees accept their compensation as equitable is critical, since cognitive bias causes us to believe we are better than we are, shaping our perceptions about relative fairness. Perception is one’s reality, so what is believed is what one will act upon. Allowing individual characteristics to influence pay administration is fraught with peril. If one employee is more competent or a better performer in a role it is reasonable to reward the person’s contributions. What someone looks like, where they came from, what they believe, and their cultural orientation should have no impact. Because of past discrimination there will always be suspicions of unwarranted bias based on personal characteristics (e.g., women are physically incapable of being firefighters). Appraising the competence or performance of an employee requires personal judgment, which makes it difficult to detect managerial bias and illegal/unwarranted discrimination.? However, sound design of performance management systems and adequate training can minimize its existence.?

Appropriately managing compensation. How appropriately an employee’s pay is managed is also a critical requirement for compensation strategy effectiveness. There are a number of questions that must be addressed: who gets rewarded; how much; in what form; when. Although it may seem attractive on the surface to do the same for everyone that might be dysfunctional. Executives and senior managers may receive higher pay and equity. Sales personnel may be rewarded for outcomes and have their pay vary from year to year based on results. Clerical, administrative, trades and operating personnel may have all of their direct income in the form of base pay, while professionals may also be eligible for variable pay based on performance. Typically, all employees receive the same benefit package, although some might be eligible for additional coverage. Einstein once observed that things should be as simple as possible… but no simpler. On the surface it would be simpler to reward everyone in the same manner, but that is often a simplistic and ineffective strategy.

Strategies for a turbulent future

?A series of “Black Swan” (unanticipated; high impact) events have disrupted economies and labor markets. Financial crises, pandemics, terrorism and changing political realities have all added to the uncertainty when attempting to forecast the future. Deciding what kind of workforce an organization will need and what the compensation strategy should be will require a different planning model. Ten-year plans have become almost obsolete and even annual forecasting has become challenging. Planners are best served by models like those SEAL teams use, consisting of a continuous “plan… act…assess… adapt… plan…” cycle.? Effectively executing a strategy that has been rendered obsolete by changes in the context will not produce the desired results. A strategy that requires continuous reassessment of tactics has a chance of delivering what is required.

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.

• Strategic Talent Management: Creating The Right Workforce
• The Most Important Asset: Valuing Human Capitol
• Rewarding Performance Globally [with Fons Trompenaars]?
• Rewarding Performance: Guiding Principles; Custom Strategies?(2d Edition)