Spheres of Compensation: Contradictions Between The Internal And External Structures And How to Take Advantage

Introduction

When I first specialized in the field of rewards and compensation, I was at first bewildered by the sophistication of the rewards systems, structures, and policies as well as the labor market dynamism and responsiveness. I was also well aware of the impact of compensation on the strategic advantage of any organization and the implications of such typically massive investments on the performance of the firm.

But recently I started to become increasingly disillusioned by the impression of sophistication I assumed about rewards and compensation systems. As under many reflections, it became apparent to me that the current system is not without flaws and inherent shortcomings, which I admit are nonetheless very difficult to resolve. One such flaw, is the contradiction between internal and external structures. Paradoxically, internal structures compose the external structure 'the market' and are also generated by it at the same time. This circularity of inputs into outputs into inputs again is one of the many puzzles I hold about this practice.

In this article I would like to explore the two 'spheres' that the compensation practice operate on. The internal organizational structure on one side and the market on the other. Hence, emerges two separate spheres, the internal and the external for our discussions. My exploration of each sphere will be done independently of the other so that it becomes possible to highlight the major contradictions between the two in the most apparent way possible.

#1 Sphere of Compensation: Internal Organization Structure

The compensation structure internal to the organization is traditionally conveyed in a table consisting of a set of grades and their related min-mid-max scale denotations. This table, professionally labeled 'Base Pay Structure' is the fundamental piece of any internal compensation structure. A lot goes into the designing, formulating, and engineering of it, but the main highlight would be that a comprehensive job worthy hierarchy of all jobs existing in the organization would need to be developed first as an antecedent piece before the final base pay structure is formulated. The actual scale values that will be fetched into the structure are often derived from a collection of market data, and here is the first formative interaction between the two compensation spheres in the form of an input from the external structure 'the market' to the internal structure 'the organization'. On a side note, you can certainly challenge all you want the rationality of calling unscrutinized massive collections of data, and its commodification and sale by consultancies to organizations as 'the market', and I am positive you will encounter very little passionate opponents.

After the base pay structure is put in place, a set of rigorous policies are then formulated that would typically leave no space for a sniff of air to go in or out. Emphasizing an imperative of predictability and control in a way that limits any possibility of overriding or changing the set base pay structure or its policies. The objectives of the policies are to ensure cost predictability and control to the organization, internal equity (a justly imperative objective), smooth progression of the career tracks across the organizational levels, and the limitations of any potential abuse or misappropriation by internal staff.

Fundamentally, the internal compensation structure 'the internal sphere' in its simplest form consists of a set of governing policies and a base pay structure that is typically rigorously formulated. In this sphere novel movements of pay are unheard off and unwarranted in any shape or form. Because the system was formulated just that they do not happen. The control and predictability offered by this internal system matches the way organizations are set up and designed. Since, an organization, this bureaucratic social arrangement of people was based on just such premises of control and predictability.

There are some questions I wish to pose as I conclude this exploration of the internal compensation sphere. First, does the current shape of the internal sphere matches or at least complements the reality of the external sphere, 'the market'? Second, does it at all support or respond in any practical manner to recent economic and social trends of rising entrepreneurialism, complex work structures and arrangements, the labor of knowledge, and digitization? Third, are the imperatives of control and predictability really the most important objectives of internal compensation structures? Is there any way to balance them with other important objectives such as retention of key talent, achievement of a more just distribution of pay, and becoming more responsive and competitive?

#2 Sphere of Compensation: The Market

As I stated in the previous section, the relationship between the internal and external spheres of compensation are rather dubious and complex. There exists a circularity in the relationship as well that should invite some skepticism about the rationality of the system. The compensation structures of each individual organization, in each specific industry and labor market collectively form the external structure, 'the market'. This market is then used to maintain those individual compensation structures internal to each organization in an endless cycle of circularity and confounding variables. Each organization experiences the the external structure 'the market' individually and has to contend with its relationship to it. If an organization is below or above the market, well that carries with it many implications that will be perceived in human capital movements in and out of the organization, and into the market.

While we started with fairly rational, controlled, well-designed, and predictable structures in the internal sphere we notice that by the time we collectivize all that through market surveys and data collection, we actually trespass into a completely new territory, which is the external sphere of compensation. Unlike the internal sphere, the external sphere is chaotic, unpredictable, complex, interrelated, and incomprehensible. This introduces a major contradiction between the two spheres, that while control and predictability is paramount for the internal sphere it is the least characteristic of the external sphere. Therefore the maintenance of internal structures 'the internal sphere' is a constant struggle of sense-making and balancing against a self-imposed chaos of the external sphere. This is also why compensation is strategic in nature.

In this section of this article, I would like to go one layer below my current level of analysis to illustrate how human capital agents, 'the individuals, interact and react to these two spheres of compensation. We will hopefully come to see how the contradictions between the two spheres offers uneven opportunities to these agents to cripple the system and go on a mission for unyielding pay maximization, offered by none other than the system itself and prevalent pay policies in and between organizations.

Human Capital Implications

The minute you join an organization, you automatically become an integral part of its internal compensation structure and therefore go on to become part of its internal sphere. Typically, you would be bound by the internal policies of the organization to what relates to pay disbursement and movement. You also become part of the internal employees population and the subsequent implications of that in terms of peer group membership for the purposes of internal equity. Your pay movement under this system, should become controlled and predictable to yourself as well as to your organization. However, and provided you maintain your market visibility, you also retain your place in the external sphere, the market.

In so far I have experienced, we have well written policies to regulate and manage our internal sphere of compensation, we control what employees receive for a promotion or a merit increment, when they are promoted and for what. However, we have very little similar policies in place to what relate to the external sphere. You actually experience the external sphere of compensation in two possible ways or times: when you first join the labor market, and when you make a job adjustment during your career. In both cases, organizations will have very little tools to appraise your market value and place you into their internal structures. In the latter, that is when you make a job adjustment in your career, you typically expect an increase that justifies your movement and compensates for any lost opportunities, work relationships, titles, perks, etc. Organizations are also typically more inclined to offer you a premium each time you move because at each occurrence they would typically perceive you as adding-value to the organization and/or coming to occupy urgently needed roles. Hence, jumping from one organization to another became a great sport for pay scavengers but never the sport of staying in one organization for your whole career.

Taking Advantage

If for some reason you have followed this article till this point, you should have realized by now that mounting pay increases in the internal sphere, the internal compensation structure of the organization, is a futile effort because the system itself was designed in principle to limit and stop that. It is very rational to conclude then that to achieve superior pay position, you need to mount calculated market moves that will satisfy your career objectives as well as reward you in the way you desire. You should also cease to expect novel pay movements in the internal sphere of compensation. Pay increases from a market adjustment (external sphere) will almost always outweigh same-organization pay increases. Of course, maintaining a membership with the external sphere of compensation is no simple task. For that, I have written a detailed article on how to appeal to the market and achieve superior pay status (by making use of market adjustments) as an employee in separate article you can find below.

Taking advantage of this system should not be confused as value-depraved or of no essence. Since, market adjustments are actually beneficial to organizations as well as employees. It facilitates the movement of knowledge and expertise in the economy and the satisfaction of workers. You don't need trickery, depravity, or any ill-motives to secure a value-adding market adjustment that will satisfy all parties. There are no ethical contradictions in terms of that here.

Concluding Remarks

It is disappointing to acknowledge that the existing complex and interrelated systems of compensation and rewards are plagued by pit holes, flaws, circularities, and contradictions that allow uneven distribution of pay opportunities to human capital agents. It is also disappointing to acknowledge that compensation structures internal to organizations stand no chance at resisting and countering a chaotic and unpredictable external structure, 'the market' that they help compose. In this system then, organizations should learn better to know when to undermine their internal compensation structures to maintain their key talent and when to uphold them for the imperatives of control and predictability.

Knowing all of this, from the two spheres perspective I introduced in this article, should help you feel less resentful and anxious about your stagnant pay movements in the internal sphere and should help you become more aware of the importance of market visibility and a membership of the external sphere of compensation, the market.

End of Article