When it’s time to fix your Compensation program, and you’re the one in charge, what do you do?

Suppose you’ve just been promoted to the Compensation leadership role in your organization, or you’ve just been hired and inherited someone else’s legacy.   Perhaps you already have ownership, but have recently experienced an epiphany that demanded corrections and adjustments, or maybe you simply have the boss’s enraged shouts still ringing in your ears.

Whatever the catalyst, suppose you suddenly face a situation where you need to fix your compensation program; how would you go about it?  Where do you start?

What would you do?

Check your points of pain

First things first; where does it hurt?  The clarion call of action is coming from . . . somewhere, so find out and determine what those burning platform issues mean for your business.

Typical problem areas would include the following favorites:

• High turnover: have your avoidable separations (excluding deaths, retirements, relocations, etc.) reached a level that has attracted senior management attention – and concern?

• Recruiting: has the Staffing section complained that it’s become increasingly difficult to attract the right caliber of candidate?  That you aren’t paying enough?

• Payroll: is the cost of labor considered too high?  Too many FTEs?  Cumulative employee expenses are out of control?

• Morale: has your organization flunked the latest employee engagement survey – and fingers point at Comp?

Or is it something else that is poking you in the eye, causing the organization to consider its compensation programs as more a problem than a solution?

Look and learn.  It’s the first step toward a solution.

Take a health examination

Next, extend your research beyond the obvious and look under a few rocks for what you aren’t being told.

Start asking questions of key management personnel regarding their views about how healthy (effective, efficient, performing as intended, etc.) are your reward programs.  Talk with line managers (those who operate in the trenches) to gain a perspective from the other side of the desk, where employee friction points make the most noise.

Then review your compensation metrics (you are using metrics as a statistical aide, aren’t you?) to determine whether the numbers are telling you a story that you might not have noticed before.

For example:

• How competitive are your actual pay levels?   When was the last time you conducted a competitive analysis?  What did it tell you, and more importantly, what did you do about it?

• Is grade and title inflation boosting costs without adding value?  Bogus titles and inflated evaluations, often used to salve an employee for whom you can’t provide cash rewards, are not  harmless gestures.  Those backdoor tactics cost real dollars, without providing a corresponding return in performance, productivity or engagement.

• What is the average performance rating, and how does that correlate with the success of the business?  If the employees tend to be rated as above average performers, while the business is having an average year, that disconnect is costing you money.

• Do you segment your employee population?  Not everyone’s external value changes at the same rate, nor does the market move in lockstep.  Find out how different employee groups (non-exempt, exempt, professional, management, sales, executives) are being treated (pay rates and trends).  You may have problem pockets, not universal trends.

Chances are that the statistics from your metrics database will validate the concerns raised from your interviews – and focus your corrective actions.

Reinforce the existing infrastructure

Likely you already have in place a salary structure, complete with grades and salary ranges.  You may even have multiple structures, based on employee segment, specialty departments or geography.  Make sure they are up-to-date.

Consider preparing a Compensation Administration Guidelines document for your managers, as a aid in applying standards of consistent treatment for your employees.  These guidelines would lay out in a single voice the policies and procedures to be used in managing your reward programs.

When are performance reviews conducted, how large are promotional increases, how are exception requests processed?  How are jobs evaluated, who is eligible for incentives, and how do you use geographic differentials across the country?  Who has to approve what actions?

And what are doing about Management training?  How do you ensure that those empowered to spend the company’s money (hiring, promotions, performance increases, etc.) actually understand the intent of your compensation programs?  Or are they making a series of well-intentioned emotional decisions that spend the company’s money without concern for financial operating pressures?

One could argue that focused training is a minimal cost solution to the problem of managers wasting the company’s money through ill-advised pay decisions.

Get your message out

Once you have determined where the problem areas are, their magnitude (impact) and the prioritization of gaining solutions, you should consider taking the offensive to make sure that your message is the one employees are talking about.

Note: most other corrective steps are defensive in nature, like putting your finger in the dike.  Survey analysis, salary structure redesign, performance appraisal modifications etc. are all reactive in nature, fixing a problem.  They don’t by themselves attack what could be your most serious challenge – employee perceptions.

• Explain out competitive you are.  Employees will never assume that you’re paying competitively.  At best they consider you average.  If you’re doing better than that, you’d better be telling folks.  Repeatedly.  Because paying above average rates to employees who think you’re average – is a waste of money.

• Use reward statements to show how much the company does for employees.  Have you ever added up how much your organization spends for the betterment of employees, for everything – not just cash?  Consider voluntary as well as required benefits, statutory obligations like social security and workers compensation, vacations, perquisites, recognition programs, company-sponsored programs, cafeteria, employee discounts, tuition reimbursement, stock purchase plans, community involvement programs, the parking garage . . . the list can be quite extensive.

Get your arms around the issues, identify your pain and priorities, communicate with employees and get started.

Have you heard this complaint before? “The Company would rather pay more to a green outsider than give one of us insiders a decent promotion”?

How have you responded?

The reason for the gripe is that, when considering two individuals for the same job the employee on the inside oftentimes will be offered a lower salary than if the company went outside to hire a stranger.  To compound the insult, it is not unusual for managers to ask insiders to train and orient the new ‘wunderkinde” to learn how the company operates.

Aggrieved employees feel that an insider already knows the company, the people, the products / services as well as the relevant policies and procedures.  That knowledge and experience is an advantage, they say, shortening any learning curve and cultural orientation.  And the “fit” has already been established. Taking on the role and responsibilities of the new position and not being paid the “going rate” seems unfair – actually a penalty for being an insider.  It’s as if the company realizes they don’t have to pay as much for an existing employee, that the time spent in the company somehow reduces their market value and limits a willingness to pay a competitive wage.

Some insiders may feel that the technical experience they have gained in their current job could be used in the new position, so that in effect they have already prepared for the new role.

However, the prevailing practice seems to be that, when a company looks to the outside recruiters will be instructed to search for someone who already meets all the qualifications of the job; an experienced candidate who has already performed the job, whose only learning curve would be a short term acclimation to the new company’s policies and procedures.  They can hit the road running.

Outsiders are considered to be free of “baggage”: no biases, preconceived notions or internal social network, and are thus considered more able to become immediate agents for change / improvements within the company.

You should also note: if someone already has performed the subject role the chances are good they are already being paid at or about the competitive or going rate.  If that is the case then the company would be compelled to pay a premium in order to attract such a qualified person.  The offer of employment would likely have to be above the going rate (or above the midpoint in some companies).

Here’s another common office complaint: “I’d be paid more money if I quit and the Company rehired me”

Unfortunately there is some truth to this gripe.  Over time the external marketability of good performers is rarely matched by annual performance awards within the organization.

Merit increases averaging 3.0% (less for satisfactory performance) may not keep pace with competitive wage growth, especially for in-demand skills.  Thus over time a company would find the prevailing external wage greater than what they are already paying experienced people.  And if you have to hire an experienced person you would likely have to pay more than the going rate, thus potentially creating internal equity issues.

You can do the math; if market pay increases at a faster rate than annual performance rewards, employee pay will fall behind.  At some point this will become a serious problem.

The cumulative impact of annual merit increases is a difficult issue to resolve, in that all employees are likely being reviewed at the same time (focal date).  Special treatment requests might create equity or precedent challenges for managers – both of which Human Resources would have warned against.

Managers should therefore take periodic stock of their staff; assess their backgrounds, experiences and performances, with a weather eye toward whether current compensation is both competitive and internally equitable.  To do less would run the very real risk of disengagement and separation – of likely your better performers.

Can you recall an instance at work where you made a mistake, an error in judgment, a bad decision?  An “oh cripes!” moment that you would have liked to have had back again?  Perhaps it was a rash decision, a lapse in sound thinking, or simply poor planning that caused you to take a wrong step.  And if you were unlucky, that error was noticed far and wide.

You remember how you felt then, don’t you?  You were likely embarrassed, surprised or even angry.  Certainly you felt awkward that you had messed up and that people had noticed.  To cap it off, in that memory of yours the wrong people had noticed, hadn’t they?

Bet you won’t do that again!

Perhaps not, but that doesn’t mean you shouldn’t stick out your neck again.  Turtles don’t make for good leaders.

Because when we make a mistake and learn from it, when we use a negative experience to help us prepare for the next opportunity, we grow as professionals – as individuals and as leaders.  That painful lesson will be more deeply embedded in our consciousness because of the fact that we did screw up, made a bad decision or used poor judgment.  It’s human nature for us to remember our foibles, and because of that to hopefully not repeat those circumstances where we had burned our fingers.

If we were risk adverse and played it safe throughout our career, if we avoided decisions, kept our head down, didn’t stretching ourselves, we would likely never fly high.  We would also never be noticed by the higher ups and our career would never quite get us where we wanted to go.

No pain, no gain?

If you use your mistakes as a learning experience, what would you learn if you never make a mistake?  Chances are your ego would swell with self-importance and what had been healthy self-confidence would have morphed into supreme over-confidence.  You would start reading your own press releases, and on that pathway lies a steep cliff.  it’s only a matter of distance.

I remember my father telling me, “at least try.”  That’s good advice for managers too.

So take a calculated risk.  I’m not talking about a roll of the dice, but a decision or an action plan based on your knowledge and experience.  Use your professional judgment and put a stake in the ground.  Stand up for something.  Learn from the experience.  And if you stumble, pick yourself right up again and get back in the fray.  Just don’t make the same mistake twice.

While most companies talk about the advantages of risk taking, many don’t walk the talk.  Instead, some organizations simply get rid of those who had the misfortune to make a mistake.  In such an environment there is always someone out there trying to trip you up (passive resistance, nay-sayers, the overly critical, etc.), or to take advantage when you stumble (enter the political animal).  All of which sends a powerful message that risks are only entertained when in fact they aren’t risks at all.

On the other hand, creativity and innovation will be fostered in an environment that nurtures decision-making, that encourages measured risks as a method of stretching oneself.  Instead of killing the risk-taker when they stumble such organizations seek to stretch the capabilities of their employees by encouraging them to do more than they thought themselves capable.

Remember, it’s only a risk if there’s a chance of failure.  Employees who are not afraid of making decisions, of standing up for themselves, of taking a risk for the good of the organization – they should be valued, not criticized or otherwise penalized.

In an atmosphere free of threats and quicksand the leader can emerge and thrive – to the betterment of the company and the employees.