Newsletter

As an Employer: What is Your Compensation
Philosophy? (Part 2) – September 2010
By Wayne Percy

As the economy starts to re-bound, most employers wil
start to hire or re-hire staff.  Most of your current staff that
ave not had a raise for the past two years, and have
stayed with you, will want to make a jump forward on
the pay scale. 

If you are like most small to medium employers, the
past two years have left you with no reserves and lower
margins.  For public companies, while it may look like
they are making money, their shareholders are getting
impatient for some returns and not likely to endorse
reduced margins because of catch-up labour costs.
Now what do you do?

Negotiating raises with current employees or new hires
is a complicated mix of issues: salary, incentive, benefits, competitor’s offers, market trends and worst of all, on-line salary surveys listing much higher pay for a
different job with the same title, a different time frame,
size of company or region.

A consistent pay philosophy gives the company and the employee a frame of reference when discussing salary in a recruiting negotiation or during an annual review.

The goal of a pay philosophy is to attract, retain, and motivate employees. For companies in the private sector, this usually requires a competitive pay philosophy. For companies in the public sector, this means a well-rounded philosophy, with a focus on benefits and work life.

By law, pay practices must be consistent across each type of employee, must not discriminate, and must not be arbitrary.  Yet a pay philosophy may include different approaches for different types of employees.  For example, a company might decide to pay a competitive rate for most jobs and an aggressive rate for jobs that are especially difficult to fill and/or contribute to shareholder value.  Such a company might pay its executives and its sales personnel at the 75th percentile and the rest of its employees at the 50th percentile.  Typically, the more an employee influences either sales or the bottom line, the higher they are on the pay grid and they have stronger incentive plans.

Hiring New Staff
Over the past twenty years, we have consistently found that the best candidates always have a career plan for themselves and that salary is just one part of their job offer.  The best candidates are looking at the whole package and the picture that you paint for their future.  Average candidates ask the salary and vacation questions early in the recruiting process.

Top people innately know that progressing rapidly is the key to maximizing compensation. Average performers tend to focus on maximizing compensation in the short term while ignoring the long-term costs and negativity involved.  Many top candidates use the comp question to quickly filter the opportunities that come their way.  Interestingly, most of these same people will take a career-oriented approach to evaluating different opportunities once they’re presented with the facts about the opportunity.

Your Company Profile
In a high growth or start-up business, you can appeal to the competitive nature of candidates by offering incentive and recognition programs combined with the opportunity for learning, personal growth and career advancement.  In the early years of building his car dealerships, Canadian self-made billionaire Jimmy Pattison, hired two new, used-car sales reps each week and fired the two lowest performers each week.  He also held outrageous weekly sales competitions with big prizes and rewards.   In a very short period of time, all of the most competitive car sales reps were trying to join the Pattison team to prove that they were the best and Jimmy’s sales grew just as aggressively.

For more mature companies, like chocolate companies Mars and Hershey during the 1980’s and 1990’s, you can target your salaries at the top end of the salary range (Mars) and demand higher performance and longer hours or you can target your salaries in the bottom third of the salary range (Hershey) and appeal to employees community and social values with lots of personal recognition and community service programs. (Hershey’s primary shareholder is the Hershey Orphanage)

Career Maximization vs. Compensation Maximization Strategy:
A career growth maximization strategy is based on the concept that rapid growth and learning leads to bigger jobs and more rapid promotions. A lot of bad things can happen when a short-term compensation maximization strategy is used to make long-term career decisions. A comp max approach typically puts the new hire into the upper levels of a salary range, leaving little room for future salary movement, even for doing good work. This is frustrating. Worse, higher salary levels leads to higher expectations of performance, and when not met, the person is considered underperforming.
Recruiting candidates the middle to low end of a salary band, job expectations are somewhat lower. This gives the new hire a real shot at beating the lowered expectations, being given above average raises as a result, and more important, being assigned to take on bigger projects. Successful performance on these projects in turn leads to promotions and consequently bigger raises. A good rule of thumb when advising others (and even for yourself) – there’s more upside being underpaid than overpaid for the same work.  

Short Term vs. Long Term Compensation
By increasing the current salary, you open a/the position up to more senior candidates making a lateral move (maybe with more modest career aspirations) or stretch candidates who are pushing to maximize their skills, learning and promotional opportunities.
A long-term compensation philosophy tries to attract, retain, and motivate good people. To accomplish these goals, use a mixture of: base pay or salary; incentive pay, whether in the form of cash or non-cash award such as stock; and benefits, or non-financial rewards.

Lead-Lag, Lag-Lead Increase Timing
Most companies review salaries once or twice a year, but the market moves continuously.  Therefore, a company's pay is likely to be at market value just once or twice a year, similar to the hands on a broken clock, which only tell the correct time twice a day.  As a consequence, companies must decide what time of year to offer raises, and whether to lead the market at the beginning of the year and lag behind at the end of the year; or to lag behind at the beginning of the year and lead at the end.

 Employee Proficiency Pegs Skills to Market Value
Some pay philosophies track the development of skills that lead to proficiency in a job.  The more proficient an employee becomes, the closer to market value he or she gets.  This is a way of paying according to a market based on the value of skills.

Paying for employee proficiency is in contrast to paying for longevity.  The formula for employee proficiency involves calculating a comparatio - the employee's salary over market, defined as the median or some other control point.  For example, if an employee earns $45,000 and the median for that job is $50,000, the employee has a comparatio of 90 percent.

An employee who has lingered at a comparatio of 90 percent is at risk of leaving the job. If the company is interested in retaining the employee, it won't cost much to bring him or her up to market.  If there is a reason the company doesn't want to pay 100 percent of market for this job, for example if the employee is not yet fully proficient in the job, it might still make sense to pay the employee98 percent of market. In the example above, the company would pay $4,000 more to their current employee, who might well merit the full $50,000 anyway, to insure against the cost of hiring a new employee.

There are several advantages of the pay-for-proficiency method.  Because pay is tied to the market value of a job, employees don't get stuck with merit increases of just a few percentage points a year.  Because the market value of a job is tied to skills, the conversation about compensation can begin from a level playing field: An assessment of how the employee compares on each of a number of measures of proficiency and skill.

Retention through Communication
Employers benefit from communicating their pay philosophies to employees, because a sound philosophy consistently applied creates a sense of fairness.  Some companies advertise their pay structure as a recruitment and retention strategy.  If a company publishes its pay philosophy anywhere, it should also tell any employee who asks.

Job candidates should also be aware of a company's pay philosophy.  If a company doesn't have a pay philosophy, it will be easy to tell during the salary negotiation.  Some companies even publish the philosophy in an employee handbook, and show employees where they are in relation to market.

It can be to a company's benefit even to communicate a two-pronged pay philosophy where some jobs are compensated at more than the market rate.  For example, one company with high turnover in its customer service department, a department critical to the company's success, decided to compensate customer service representatives above market.  Customer service people got better work spaces, incentive plans, and higher-than-market base pay.  In communicating this change in philosophy to all employees, the company outlined the business reasons for the philosophy and the value to the company.  It became easier to hire and keep personnel for customer service jobs, and the plan succeeded.

Employees need to see the connection between their role, the value that they add and their compensation to understand their own value.  Pay philosophies are important for companies of all sizes and stages because without them entrepreneurs could end up underpaying or overpaying for employees.  Both problems result in a cost for the company, either in turnover or high salaries.

How-to Tips
To be successful at salary negotiations, you need to do your homework and play fair.  Here’s how:
1. Understand how the job and salary fit into the:

2. What other compensation is involved?  When you’ve reached the limit of your salary caps, stretch your attractiveness to the applicant with enhanced:

3. Ask yourself how badly you need the candidate.  Careful with this one. It can lead you down the slippery slope of bad judgment.

4. Check your ego.

5. Communicate with fellow interviewers.

6. Degree of risk factors for the candidate.

7. Put it in writing.
Once you’ve agreed on a benefits package and the applicant has accepted the offer, pull together a letter of agreement.   Good luck starts with good planning . . . .

Wayne Percy

executivemobility