This article first appeared in the April, 2005 edition of the Jacksonville Business Journal
Compensation systems seldom work exactly as intended. Even the best compensation system is often an exercise in damage control.
Consider the following dilemma. You hire a new engineer and pay her the current market rate. She performs very well and receives an above average raise at year end. You now hire another new college graduate engineer. Market conditions require you to offer more to the new college hire than you are paying the engineer you hired last year, even with the raise you just gave her. She complains, asking to be brought up to the same level as the new hire, plus the value of the raise you just gave her. You can't do that, but promise that you will fix the problem within the bounds of company policy and business results - and that she should maintain a longer term view of her career potential. She is not happy.
Sound familiar? It happens all the time. There are so many conflicting influences on salary that any compensation system - no matter how well designed - is filled with unintended inequities and limitations.
Paying for Performance is Hard
We all say that we pay for performance. But consider all the other variables that influence salary increases. Salary raises are impacted by length of service, the employee's relative position in the salary range, general economic conditions, company performance, criticality of the position, perceived replaceability, size of the salary increase pool, number of people in the work group, etc. So many factors are involved that there is very little room left for performance.
Here's a classic example. Your company has a policy that allows from zero to 15% annual increase, within each salary range. Your company has allocated 5% for salary increases for this year and you may not exceed the 5% allocation. You have six direct reports. One is a superstar. But if you give 15% to the superstar, you will be forced to give one or two percent to several others to stay within the 5 percent limit. So you give raises of 4, 5 or 6 percent to everyone. This did not leave much for performance differentials.
Here's another example. You give an individual a critical assignment in August. He does a great job, completing it ahead of schedule. Now it's January and you want to reward him with an extra $1,000 in his annual raise. But if he remains with the company for the next 25 years that $1,000 will be part of his salary every year, and the long term value will be $30,000.
Using the Right Tool
The solution is in the selection of the right tool, and in using it for the right purpose. A hammer and a saw are both excellent tools. But if we use the hammer to saw a piece of wood or use the saw to drive a nail, neither tool works at all. That is the problem with using salary adjustments as the primary vehicle for rewarding performance differentials.
Salary should be the core tool for defining the base compensation for a position. It is primarily driven by market conditions - not by individual performance. Individual salary should be defined by the value of the position in the market, adjusted for education, experience, and qualifications. Some differences evolve over time regarding performance, but the primary factor is the market value of the position.
Then a separate performance incentive program should be developed for every position where measurable results can be defined - almost every position. Some are easy and commonly used - such as sales commissions. Others require more thought and creativity.
The incentive plan is funded based on company performance. Funding is triggered when the company achieves defined financial targets - revenue, profitability, etc. There is often a separate trigger point for 50, 75 and 100 percent funding. This encourages everyone to work as a team and ensures the company has the resources to pay for the incentives.
Once triggered, rewards can be allocated on a general company performance basis, a team basis, a project basis, or individually. This allows for significant differentials to be paid to top performers without long-term salary consequences. Aligning salary to market value and incentives for performance creates the flexibility to reward top performers without creating long-term compensation problems.
|
