It's Time to Disrupt Compensation

"According to the Pew Research Center, when adjusted for inflation, the federal minimum wage in America peaked at $8.54 in 1968. If the federal minimum wage had kept up with increases in worker productivity since then, in 2012 it would have been $21.72 an hour."(Worstal, 2015).

Put another way, in terms of buying power, the minimum wage peaked 50 years ago and it's been eroding against inflation ever since.

More than half of jobs in the US pay $20 or less, so most people earn below what the minimum wage would be had it kept up with inflation. Actually, almost 70% of workers fall below that inflation-adjusted minimum wage (CNBC).

The eroding wage is a problem, but the entire compensation philosophy as we know it is flawed and has created a much lower standard of living than our parents had - regardless of what the politicians are feeding you.

It's time to disrupt compensation.

Specifically, base wages. Employers have done a good job putting a spin on total compensation with discount programs and creative time-off policies, but no one is innovating changes in the amount of dollars that appear on your paycheck. All the discount programs in the world won't make a difference if you don't have money to take advantage of them.

I'm not saying just give everyone more money, though from the examples above, it's clear that's what should have been happening for the past 5 decades. I'm saying, let's start helping people be their most productive, most profitable, most quality driven, most engaged selves, and pay them more for doing that. 

Your company's long-term outlay in terms of total compensation will be dramatically less as every member of your team will be operating at peak efficiency and they will be more engaged and happier. You will hire fewer people than you do currently and the ones you hire will do more and be love doing more.

Here are 4 suggestions that will disrupt the workplace and the economy in positive ways. Any company that implements these measures can expect to see, on average, an extra month of productive time from every full-time employee every year from now on. 

Let's talk about common mistakes almost all companies make and the specific disruptions that will resolve them.

"We'll make you the boss because, honestly, we don't know what else to do with you."

That statement seems ridiculous, but most organizations don't just say it, they scream it. Maybe not in those words, but when you consider who they promote to manager spots, it comes through loud and clear.

It works like this. Someone is a solid performer. They've been around long enough to top out their salary grade and unless there's some other way to compensate them or to disregard the salary grade, we tell them, "You're a solid performer, but unfortunately, you're at the top of your salary grade and so to make any significant increase, you'll have to go into management."

For most people in this situation you might as well tell them, they'll need to grow a third arm.

Following this course promotes perhaps the worst example of adverse selection there is - leadership by non-leaders. Not everyone can be a leader. Most people believe leaders are made and not born but that's not what the data tell us.

According to a study by Gallup only about 1 in 10 people have the rare combination of talent required to be a great manager. Another 2 in 10 can be taught enough to get by, but that's only 3 in 10. That same study revealed that companies hire the wrong person to be the manager a whopping 82% of the time. Eighty-two percent. Put another way, 82% of current managers are not fit for the role.

And yet, we still tell people who reach the top of their salary grade that to make more money, they'll need to go into management. In other words, we're going to push you from something you're good at doing to something you are probably not good at doing - because if they were good at doing it, they'd already be the manager.

When you're stuck in a job you're no good at doing you can never reach peak performance and productivity. Never.

The First Disruption - Compensate the people who are solid performers to stay right where they are for their entire career. More on this to follow.

"You're the star performer on the team so naturally, you will be the best manager of the team."

This is like saying, "You're really good at preparing the operating room. After lunch, will you come by my office and remove my gallbladder?"

The argument here is, "you're good at x, so naturally you'll be good at y" where x=apples and y=oranges.

It's the Peter Principle - people rise to the level of their incompetence because we keep promoting people who are the best at their job until they're put in a role they're not good at doing. But it's not their fault. 

A recent study among 214 sales organizations established that the performance of the entire team actually declined by 7.5% after the star performer was promoted to manager.

Being a star individual contributor does not make you a great manager. They are two entirely separate skill sets and require a different set of talents. It's possible that a person could be good at both, but they're going to be best at one or the other. And therefore, peak productivity and peak engagement will only come when they are doing the one they do best. Being great at both is exceptionally rare. Being equally good at both is frankly impossible.

I've talked to scores of managers in exactly this situation, and they are miserable because they gave into the pressure to become the manager of the area over which they were the star. And now, they can't go back, or won't go back because, wait for it, they make too much money.

I coached a senior executive that made the off-the-cuff comment, "Between you and me, I'm not that engaged in this role. If it weren't for the money, I"d go do X. But you get to a point where you have a certain lifestyle and you just maintain it."

Sad. And honestly, a little bit selfish. Because what if someone who really was engaged were in that role? Someone who looked forward to going to that job every day regardless of the salary. Someone who is involved in, committed to, and enthusiastic about that role. How much better might that entire organization perform?

The Second Disruption - stop making managers out of star performers. It doesn't work.

"The Manager has to be the highest paid member of the team."

This is a good place clear up a common misconception: Individual contributors aren't worth as much as managers.

Nobody says it that way, but current compensation practices scream it. 

If the best server in the restaurant, the one people ask for, the one bringing the repeat business, the one creating the income that pays your managers, the one who's true calling seems to be serving tables at your restaurant, can't be paid enough to keep them exactly where they are for as long as they want to be there, then we're doing compensation wrong.

A top server may very well make more than the manager of the restaurant due to performance and experience. A new manager might be a great leader, but they may be inexperienced and so it's okay to pay them less than that server. Really, it is. When that new manager is at the top of the management game, they'll be rewarded for their role too. 

The Third Disruption - stop paying managers more than all other members of the team, just because of their title.

"Pay Your Dues and then We'll Promote You to Manager"

In fact, if we do it right, we identify great managers early in their career. That great leader may be making $25K as a manager in development while fully developed, stars on their team are making two or three times that amount.

Find a way to detect leadership early and act boldly to get them the training, development and experience they need to move onto a management track early in their career.

Leaders are born that way. They're ready to lead, they just need sufficient training and development in leadership competencies to hone their talents and obtain the tools necessary to be successful. Time on job is irrelevant because people are leaders, or they're not. Time spent as an individual contributor will not build leadership talent.

The Fourth Disruption - Stop requiring people to have long tenure and lots of individual contributor experience before they can lead others.

"So, smarty-pants, how do we disrupt compensation?"

Establish a Management Career Path

Most companies do not have a formal management career path that 1) identifies leadership talent early, 2) gives early leadership opportunities to validate leadership talent, 3) places people in formal leadership roles, even junior ones, while these rising leaders are being developed, and 4) have formal leadership training with mentoring and coaching.

Hardly any organizations that I've ever worked with have any of these and NO organization should be without number 4. Yet, very few companies develop managers once they have been put in place as managers.

Hire for leadership

Don't just hire people for whatever roles you have available and hope that in that mix you will find tomorrow's great leaders. You might get lucky, but what if you're not? Hire for leadership today. Fill those newly minted junior leadership roles today. 

Detect leadership in existing workforce

By all means promote from within, but go in with eyes wide open. As mentioned above, statistically only about 1 in 10 people have the natural talent to be a leader. And only about 2 more in 10 can learn enough to get by. So if you have 100 people, you're probably going to find around 10 who will make great leaders. 

So yes, hire from within if you can, but realize that your pool of leaders is going to be extremely limited.

Provide leadership training to leaders - not everyone

Training resources are valuable, so don't send non-leaders to leadership training just to appease them. Have meaningful development conversations with everyone, but help them find their own career track and then help them achieve greatness on that path. Leadership training slots are for those 1 (or 2 or 3) in 10 that can be leaders. Nobody else gets in - period.

Provide leadership opportunities

Provide not just training, but leadership opportunities through high visibility projects and also in formal junior management positions that you can hire people into. The typical path here will look something like this:

• Hire for leadership talent
• If you establish it and can hire them into a leadership role directly, do that.
• If not, within the first 90 days assign a high visibility leadership laden project for the candidate to manage.
• Coach and encourage based on the pre-determined expectations.
• Review the success or failure at the end of the project.
• Determine whether they are ready for a junior management role or if they should be an individual contributor.

Establish broad salary bands for all roles

Determine for every job what the salary bands are and make them wide enough that a person can make a living wage to the end of their career in that role that they do best. Establish training, mentoring and coaching process for all individual contributor roles

Salary Increase Management

This disruption of compensation will fail if you don't have great managers who are willing to have hard conversations, reward those who deserve it, and bypass those who don't. Salary increases should be merit based, not an entitlement for time served. It's okay to pass by a person for an increase but if this is done more than once, you should question how well the person fits and how well their manager is at helping them achieve their objectives.

It's time to disrupt compensation. When we do it will have economy changing implications. It will have human well-being implications. It will raise the tide of productivity, profitability and individual wealth and in so doing, lift all the boats.

Ryan Houmand is founder of Ryan Houmand Coaching. He helps individuals and organizations love Monday just like Friday, but for a different reason. He is a speaker. He is the author of "A Passion for Monday" and has appeared on NBC, CBS and FOX to discuss "The 3 Mistakes that Make People Hate Monday". Find out more at RyanHoumand.com or contact him directly at [email protected]

Links to sources:https://hbr.org/2018/03/research-do-people-really-get-promoted-to-their-level-of-incompetence

https://www.forbes.com/sites/timworstall/2015/09/07/there-is-absolutely-no-reason-why-the-minimum-wage-should-track-average-labor-productivity/#2d6117074afa

https://www.cnbc.com/2017/08/02/how-much-the-richest-americans-earn-per-hour.html