Pay for the Job, the Person or the Results?
How base pay rates are administered can vary across different occupations.?Direct sales personnel are most often paid for producing tangible results in the form of sales.?Research scientists and other professionals are typically paid for the qualifications and capabilities they bring to the organization, as well as the type and level of work they are able to do.?But the majority of employees are paid based on the job they hold and how well they do it.?Since different occupations are expected to make different kinds of contributions (make sales; utilize competence; perform job duties) it is prudent to tie the way they are paid to the type of contribution they make.?This article will first describe the different approaches to base pay management.?It will then discuss the implications for overall human resource management strategy.?
Paying For the Job
Most organizations utilize base pay systems that tie rewards to the roles (jobs) employees hold.?The CEO job is paid more than other jobs within the management hierarchy.?The senior level job is paid more than the entry level job within job families.?The “pay the job” approach requires establishing pay ranges that reflect the relative internal value of the job and the market value.?Jobs are placed into grades within a pay structure in a manner reflecting relative internal value.?Pay ranges are assigned to each grade, based on the competitive pay rates prevailing the in the relevant labor markets.?These pay ranges define the pay potential for incumbents of jobs within each of the ranges.?Finally, individual pay rates are administered according to a strategy, that can be to pay for longevity, pay for mastery, pay for performance or a combination of these determinants.
Paying For the Person
In contexts where people do not have well defined duties and/or who change roles rapidly it is difficult to tie individuals to specific jobs.?For example, an Engineer or IT specialist who works on a new product design project may have a specified role with defined objectives (e.g., design a circuit that has the characteristics required).?That same person may, after six months still be working on that circuit design, but may also assume a project leadership role for another project, which may span eighteen months.?Or (s)he may play a “fire fighter” role on a continuous basis, responding to production problems as they arise.?This type of context is increasingly common and poses challenges when attempting to use defined jobs as the metric for administering pay.?
When it is valuable for an organization to have employees who are capable of performing a variety of tasks a case can be made for paying for additional capabilities.?Skill-based pay systems can compensate employees based on the breadth and/or depth of skills they possess.?Pay increases are earned when an employee demonstrates a greater level of mastery in a skill or developing a broader variety of skills.?There may be provisions in skill-based plans for adjusting pay if an employee’s competence in specific skills atrophies or when skills are no longer needed, but this is a difficult thing for employees to accept.?As a result, the system often falls apart if the skills needed change frequently and there are not new skills to be learned to replace the old ones, allowing current base pay rates to be justified. Another danger of using skill-based pay systems is that it can encourage employees to be full-time students, spending effort to learn new skills rather than doing the work.
Employees whose career path is most likely to remain in their occupation, with advancement based on competence level, are often classified using career management structures (ladders). The levels within a career ladder are defined by describing what type of work the employee is competent to perform (nature; complexity; difficulty; scope), as well as the latitude exercised, the potential impact of the work and the qualifications required.?Specific qualifications can be extremely important in occupations where licensing/certification is mandatory in order to perform the work.?As a result, many professional occupations (e.g., Legal and Accounting/ Finance), as well as technical occupations such as water treatment plant operators and nurses may have licensing/certification requirements for each of the levels.??
Paying For the Results
Sales personnel are most often measured and rewarded based on tangible results.?Production employees may also be paid at least partially based on their physical output if they are in control of that output.?The rewards for results are in the form of variable pay and this approach may result in base pay levels that are set at relatively low levels.?A sales representative may technically have no base pay, with all of their direct compensation based on results, but production workers typically are assigned base pay rates that are competitive and that provide a reasonable level of income when output is impacted by conditions outside of their control.
Management personnel are normally valued based on both their role and the results produced.?They generally have a significant part of the current cash compensation in the form of incentive programs and senior level people may also have long term incentive programs in place.?This portion of their direct compensation is most often tied to some measure of financial results, although meeting specified operational objectives may be considered as well.?But base pay rates are administered based on the job/role of individuals and where it fits in the organizational hierarchy.?The result is a total direct compensation package based on a combination of job-based pay and results-based pay.
One Approach Or Many?
There is a strong case for basing direct sales personnel’s compensation largely on results.?The same principle can be applied to management incentives based on results, and volume-based incentives for particular types of production personnel.?There is an equally strong case for using job-based pay administration for those in stable, well-defined roles with clearly defined performance metrics.?Yet base pay is in effect a fixed cost and it may be preferable to moderate base pay growth and reward performance with variable pay programs.
A highly skilled Engineer/Scientist performing research is likely to be paid based on what knowledge, skills and abilities (KSAs) that person brings to the organization.?It is up to the organization to utilize the KSAs in a manner that justifies what the person must be paid.?If a Senior Design Engineer is placed in a job that requires a much lower level of competence the organization will still have to compensate the person for what they are capable of doing, rather than what they are doing.?Otherwise the capabilities can be taken elsewhere.?An example of the “capable of vs. currently doing” dilemma is a Software Engineer who spends a significant amount of time documenting a system (s)he designed.?This may be operationally expedient, even though this seems an underutilization of that person’s capabilities. Since it may take the designer longer to explain the system to a documentation specialist than it would for the designer to do the documenting personally it may be the best approach to let that person work "below grade.".?
The increasing importance of project management also raises the issue of whether to pay for what the person could do or what they are doing.?Given the complexity, scope and duration of some projects the person managing the project must be a highly skilled project manager.?For example, when a project manager completes a long-term, large complex project the organization might not have another project of that magnitude to assign the project manager to.?The NASA entities are mission-based and NASA often faces this dilemma.?If the person is assigned to manage a smaller, less critical project than they have managed in the past the organization has several alternatives:
1) keep the person’s pay range and pay rate the same,
2) reclassify the person to the grade/range for the level in the project management career ladder warranted by the new assignment, or
3) let the incumbent seek other opportunities warranting her/his level of skill.?
The practice of letting employees leave with a commitment to stay in touch and welcome them back when the need arises is common in places like Silicon Valley.?It keeps people challenged and pays them in a manner fitting their contribution.?
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There is increased usage of the career ladder approach for staff professionals (HR, Legal, IT, Accounting/Finance, Procurement, etc.).?They often function in a “fire station” mode… the staff responds to needs as they arise.?In addition to their fire-fighting duties many staff personnel participate in a series of overlapping projects… install a new HRIS, revise the Compensation system, ensure compliance with a new law/regulation.?This is why it is often difficult to write a “job description” for employees functioning in an “as needed” environment.?When the head of a staff function organizes and staffs a unit there is a need to fit the workforce mix to the probable work mix.?An HR function in a complex, dynamic organization may be called upon to support not only recurring transactions but to staff multiple projects of varying levels of complexity, difficulty and duration.?This creates the need to project the optimal mix of skill/knowledge depth and breadth and to select and develop HR employees so they collectively can meet the challenges that are most likely to be encountered.?
Administering base pay rates for people operating in this type of environment is challenging.?A number of policy questions need to be resolved:
1) does a person working at a competence level that is below the level into which they are classified retain their base pay rate??
2) are increases given on the same basis as those working at the same competence level?
3) how long can a person be paid above the level warranted by what they are doing??
During economic downturns many organizations are forced to reduce staffing levels to align people costs with revenues.?They have to decide whether to keep highly skilled/highly paid people so they are prepared for the return of prosperity… or to keep the less skilled/lower paid people and achieve greater cost savings.?If organizations have done an assessment of their workforce skill mix compared to the work mix this might present an opportunity to intelligently decide how to better align the two.?The pandemic decimated revenue streams for may organizations and choices were necessary as to what level of payroll could be supported. Reducing payroll can be accomplished by reducing headcount or reducing pay, and the latter rarely works out well. As the pandemic subsides decisions must be made about re-instituting pay levels if they were reduced for some employees. Since base pay tends to be a fixed cost resistant to reduction some organizations would be wise to consider the use of variable pay programs to enable compensation costs to be aligned with revenues.
Conclusion
The most fundamental question about how to pay people is what they will be paid for.?Results? Qualifications??Doing a specific job??The right answer is often complex to discover and all three approaches can fit different occupations, roles and organizational designs.?
Rewards practitioners have been using all of these approaches and the technology for designing and administering the various types of base pay management systems is well known.?It can appear to be simpler to pay everyone using the same approach, even though the actual administration of pay rates can vary to fit the situation.?
But the lure of “one system fits all” often results in adopting a strategy that does not fit many occupations and roles.?The “default” position in the public sector has been to classify employees based on the job they hold and to pay individuals based on longevity.?The weakness of this approach has been made apparent by the experience of the U.S. federal government GS system.?This system mandates that “fire-fighting professionals” be considered as having a stable job, that can be evaluated and placed into grades using a point factor job evaluation system.?It also pays individuals for longevity rather than performance when a time-based progression step system is used. This approach is likely to be viewed as inappropriate by the best performers. The inadequacies of this approach have resulted in the removal by individual agencies of at least half of the federal workforce from the GS system.?Whether it is the requirement to classify employees using a job based approach or the requirement to pay for longevity that has prompted this exodus to “excepted service” systems it is clear that it does not work for a significant percentage of employees.??
“What works is what fits” should be the guiding principle in determining how base pay rates are administered.?If this means paying some employees for the job they hold, others for their capabilities and yet others for the results they produce it may result in a more complex system.?But it is likely to produce a better result.?
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.
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