In order to manage reward programs effectively compensation practitioners and senior management need to understand how competitive those programs are.  In making that determination, though,  just how precise does the analysis have to be?  To what lengths should one go to increase the level of exactitude in the analysis, and is that effort worthwhile?  Does the effort to squeeze out greater precision bring meaningful results?

What’s the additional value of dotting the “I’s” and crossing the “T’s”?

As you know, the competitive “marketplace” for reward program surveys is an imprecise animal, subject to numerous variations and interpretations.

• One survey doesn’t use the same companies as the next survey.  Who to believe?

• The ability to match jobs varies from precise to broad “like roles”

• Surveys provide different mixes of industries and revenue (size)

• The use of weighted average / Average / Median / 50^th percentile formats is not always standard

• International surveys often fail to provide enough information

In addition, the market is a moving target as population changes, organization shifts and changes in employee pay are factored in.  This means that you’ll need to be careful of “aging” factors, such as adjusting data from date of collection to the current or some future date.   My practice rounds to the nearest 100 units of annual currency.  Is that distorting data?

Pick a number?

Do you really think that a market rate of $47,570 for a particular job is an accurate reflection of current trends, or simply an arithmetic average of data that looks precise?  Would you fall on your sword over that figure?

Using three different surveys would likely provide three separate figures.  Let’s say your sources report $46,223, $47,612 and $48,875.  If cost, time and effort are not factors to consider, then keep going, searching for that common denominator.  Purchase another survey source.  Double and triple check your job matches.  But do you think that the extra source, the extra time and effort will substantially change your initial analysis, or are you simply looking to protect yourself?   Are you playing a defensive game to divert potential criticism?

For most of us a quick and straightforward analysis suggests that approximately $47,500 is good enough.

While not advocating a sore thumb analysis I do suggest you use a balance of time, effort and cost when conducting market analysis.  What you really need is to understand the market; that’s the key learning point.  Repetition is sometimes just that, more of the same with little increased value.

What degree of precision are you being asked to provide?  Are you being instructed to feel  the pulse of the marketplace,  to get a sense of what is being paid out there?  Do you need a more precise result?  Is your audience demanding more?

Or is the analysis process up to you?

Is the market a number?

What is that market?  Anything within +5% to -5% of a “market rate” figure is close enough for me.  Others believe that variable should be 10%, but in my view that leaves too wide a range that could distort your intent to provide the so-called “going rate” trend.

Caution:  You can find any number of analysis paralysis jockeys out there who advocate increasingly precise techniques to zero in on what they call your true market rate.  Just remember that many vendors have built a business around encouraging organizations to slice and dice whatever information is available, trying to define and refine exactly what a “market” is paying, what jobs are exact matches and after a fashion what numbers you can rely on.

Part of their marketing strategy is to use custom designed evaluation techniques and a proprietary job matching system.  Use of such a strategy effectively marries the organization to the vendor, as one often can’t effectively use proprietary language and techniques with other survey providers without comparing apples and oranges.

The leadership perspective

From a senior leadership perspective, do you really need that depth of precision to make a business decision?

I think you don’t.

There is a place for precision, and a place for trends – for a “feel of the pulse.”  Usually senior management wants to gauge the big picture – the overall strategy and its implementation status – letting professional specialists deal with the tactical matters and details.

Have a care in your efforts  to be precise, because when you give senior management too many details they tend to dive in almost as a defense mechanism, as if they have to ask questions. Where they might otherwise have nodded their heads at key points in your presentation, you can instead find yourself immersed in detailed analytics that can bog down the decision-making process.

When senior management asks a question, office life becomes an “all hands on deck” fire drill of employees rushing about to get the answers – to questions that might not have been asked in the first place if you had played your cards right.

Management wants your professional judgment.  They don’t want you to defer opinions to what a   survey says.  Use survey data as a backup.  Don’t feel you always need to lead with it.

Standing back and pointing at figures is like leading with your chin in a fight.

You won’t like the results.

Image courtesy of winnifredxoxo

While I currently live in Central Florida, I’ve had what might be described as an east coast business environment for my petri dish or cauldron of learning experiences.  But after several years of dealing with multiple locations, industries, personalities and viewpoints in my compensation consultancy, I’m wondering whether I’ve been brainwashed for all these years.

Would someone from the middle of Oklahoma, or Kansas or North Dakota think and feel the same way about compensation issues as I do?  And what if you ask compensation specialists from retail to hospitals to manufacturing to financial institutions?

In other words, do all U.S. compensation practitioners view the issues that surround employee rewards in the same fashion, regardless of geography?  Regardless of industry?

Of course, or of course not?

So I’m wondering, does the where or what of your organization affect your operational thinking, as in how best to manage your organization’s reward programs?  Or do we experience a universal sameness of thought?

It’s already well known that on the international stage various geographic regions, and even specific countries think differently than we do when it comes to rewards.  Have you dealt with India?  With Japan?

Close to home we often hear of east coast / west coast attitudes and perspectives regarding numerous aspects of daily life, as contrasted to the more conservative “middle America,” where supposedly traditional thinking and values of the “heartland” still predominate.  I don’t know if that commentary is spot-on, or completely off the mark, but it does beg the question that if true, what other aspects of personal and / or organization thinking might be different from what the two coasts consider the norm?

We accept differences in philosophy according to industry-type, and we know different countries offer a different perspective.  So too perhaps you have the small company vs. large company outlook – as well as that of the multi-national conglomerate.  Some employees are like us, practicing a “live to work” philosophy, while others out there simply “work to live” – and consider us somehow twisted in our logic.

Although we all face the same challenges with employee pay, how we consider the possible causes and solutions  – well, that might differ. And perhaps it differs by geography.

This may be why some newly hired employees fail to accept, or be accepted into, their new employer’s culture.  While they may have the necessary technical background and experience, they still may not be comfortable with “that’s the way we do things here.”

Organizations tend to have a certain way of thinking, and while it’s nice to consider new hires (new blood) as adding creativity and fresh thinking into the mix, what frequently happens is that the new thinking hits a wall of ingrained habit.  With a thud.  Professional journals are full of success stories, but as they say about Las Vegas, for every winner there are hundreds of losers.  For every change agent there are hundreds who get forced out of companies because they think “different;” too different to be accepted.

What do you think?  Is there something to this geographic diversity of thought, or are we all examples of cookie cutter thinking?

Image courtesy of NASA Goddard

“Loud and angry doesn’t make you right.  It just means that you are loud and angry”

(author unknown)

Have you ever worked for or with someone like that – a shouter?  Someone who felt that just by force of will – or decibel level – they would get their way?  That they would get you to do what they want, simply because they said so?  Some managers are like that.  It’s not so much what they say, but how they say it – usually with a scowling facial expression that coordinates well with a loud, blustery voice.

I am who am, so do what I say.

Those who rely on their title, their loud voice, or other trappings of power to force compliance by subordinates or colleagues do so because they can, and because they’re rarely able to gain an audience any other way.  It’s like a parent who, when lacking more effective strategies finally blurts out to misbehaving kids, “because I said so.”

Is that who you have to face every day?  How much respect do you have for that manager, personally or professionally?  Chances are it’s not much.  If these managers had something useful to say, something important, or even reasonable, they wouldn’t be shouting.

Leadership isn’t about shouting.  Bullying is.  Intimidation is.  But that’s not what effective management is about.

Painting the picture

Let’s see if you recognize other aspects of the manager that no one likes.

> Doesn’t listen to anyone: Tends to always have the answers, giving lip service to contrary opinions and acting as if their mind was made up before the discussion.  Meetings are usually a process of  going through the motions.

> Surrounds themselves with “yes people”: Holds “discussion” meetings, but typically with hand-picked subordinates who tend to agree with the manager’s opinion.  Every time.  Contrary voices are discouraged through passive resistance or by simply being ignored.

> Quick to take credit: When things go well, they are quick to point out who was in charge, whose idea it was, who was right all along.  The word “I” is used a great deal.

> Equally quick to place blame: When things don’t go quite so well, they are equally quick to disengage themselves from responsibility, often distracting attention by pointing elsewhere.  Subordinates become useful scapegoats.

> Plays the political game: Focuses time and energy to become well connected in the organization, aligning themselves with perceived “winners” among senior management.  Their own opinions become fluid and secondary to the support of their political mentors.

> Is all about “optics”: Displays a tendency to focus less time and energy on personal core values and beliefs; instead is all about what “looks good” to senior management.  Culprits are especially concerned with own standing among key leaders, and are often seen as followers within the leadership circle.

> Subordinates are expendable: Cannot be trusted to support subordinate development or decision-making.  They are more likely to throw subordinates under the bus when results, procedures or activities are challenged.

When I first considered the personality traits described here a name or two came to mind from my own career experiences.  How about you?  Think of someone?  Someone you’re working for today?

When you don’t like someone, when you lack professional respect, what happens in the workplace?  Do you help them?  Or do you instead stand idly by and let the chips fall where they might?  Do you let them fail?  Do you give it the old college try, or provide a more modest “do enough to get by”?  Do you find yourself still performing at your usual 110%, or perhaps your efforts have slackened off a bit?

What to do?

In my long experience I’ve come to realize that you’re not going to be able to change these people.  They’re set in their ways, comfortable with their management style and likely feel that they are in fact successful managers.  They could also be protected from above.  Thus you can’t talk to these people, never mind get them to address personality flaws.

Complaining to HR is often a fruitless exercise, as their hands could be tied as well.  And as a whistleblower your career prospects within that organization could also be affected, in a negative fashion.

So you either swallow twice and live with it, or you exit the organization (escape) as soon as you can.

Meanwhile, it is my fervent hope that when you look at yourself in the mirror you don’t see examples of “the boss from hell” staring back.

Because I don’t want to work for you.  I don’t want to work with you.

Are your pay practices good for the goose, but not for the gander?  Do you find recurring instances where your senior leadership is considered exempt from the equal treatment clause that governs everyone else?

You know what I mean.  You know that sometimes the rules of the game are applied on the basis of who you are.  One common example concerns executive pay.  How many times have you heard the story that the company needs to continue paying high compensation levels to senior executives, no matter what, “because we need to provide competitive packages to attract and retain such talent”?

Does anyone say that about you?

There is a rationale, of course.  As a defense against those who criticize excessive levels of executive reward, the point is made that “we have to pay these levels, or else we won’t be able to attract the proper talent to run our business.”

Really?

When business is good and the road ahead is smooth you’ll hear the common refrain of “we’re all equals,” or “we’re all in this together.”  These platitudes sound great in press releases and employee communications, but walking the talk is even better.  And therein lies the rub.

Attraction is one thing, but when leadership doesn’t deliver the performance they were hired for, the defense rationale of executive pay levels will shift from pay-for-performance to something quite different.

The logic of the attraction argument usually breaks down when company performance has been particularly poor, or certainly less than expected.  Contrary to those oft-repeated platitudes executive pay often isn’t significantly affected, while elsewhere in that same organization poor business performance commonly equates to dramatic changes – like layoffs, pay freezes and other negatives.  The individual employee takes it on the chin for poor performance, with reduced or lost opportunity for pay growth (if they still have a job), and instead are saddled with the burden of additional work to take up the slack for their separated colleagues.

But the leadership who steered the ship onto the rocks in the first place is somehow held harmless.

Unless of course you don’t believe that there’s a correlation between effective leadership and business success.

So I ask myself, why doesn’t the same logic of pay-for-performance, with gains and losses based on the result of one’s efforts, only apply for those not charged with leading the organization?  Why does it seem that this “we need the talent” argument is only made for the top of the house?

This contradiction in accountability is often a sore point with employees, one that feeds a continuing mistrust of management.  The perception out there is that there’s a double standard – that the game is rigged, so to speak.

They can drop me like a ton of bricks if I screw-up, the comment goes, but for the leadership players in the Executive Suite their own performance-equals-reward formula is different than ours.  In their world it’s more important to pay a competitive rate, an attractive rate, no matter the performance.

Employees don’t accept that logic.  Would you?  It sounds too much like the practice of providing rewards is slanted against the average employee; they’re expendable for the barest of reasons, but for the top of the house it’s a different story.

So where is this line in the sand?  How far up the hierarchy does one need to reach before performance becomes a secondary consideration?

I’m just wondering – because I’d like to be treated like that.

Wouldn’t you?

Over the past several years most organizations across the country have cut back on employee reward programs, what with frozen salaries, minimal pay rises, shrunken incentives and even the scaling back or elimination of 401(k) matching funds.  With unemployment having reached 10% at one point and today still above 8% employee compensation has stagnated.

However, with the economy now starting to show signs of life (fingers crossed) some elements of the workforce are starting to ask when their employers would be reinstating those monies lost through recessionary restrictions and cutbacks.  The viewpoint is that if a salary was frozen or if increases were restricted over the past few years, when better times arrive the company owes payback for that loss of income.  Estimates vary, or course, but such an action would mean several additional percentage points of increase this year alone to catch up – perhaps more, depending on how fanciful the complainant is.

But that ain’t gonna happen.

When the 2011 fiscal year closed for most several months back companies added up their figures, reported results, shut the books and then moved on into 2012.  They will likely do the same for this year as well.  So case closed.  There is no going back to address what could’ve been but wasn’t.

Unfair?  Are you one of those who think that you’re owed those so-called “lost” dollars?  Then consider the dilemma as a business problem for the company.  Management will not want to be saddled with additional fixed and reoccurring costs just as operations are struggling to regain strength.  While they will likely strive with renewed energy to reward performance in a competitive fashion, as long as it’s affordable given their financial posture, they will not revise their reward programs to pay for entitlement vs. performance, or on the basis of whether or not they’re doing well in a particular time period.

Ain’t gonna happen.  That ship has sailed.

Companies cannot easily “make up” for revenue lost during those down times, nor can lost accounts be quickly replaced, never mind the price increases that had to be put off.  So it hasn’t been just the employees who had a lot to swallow.  Each fiscal year tends to stand for itself, with little cumulative value past year-end.  The same can be said about rewards, with little acceptance for the concept of being “owed.”

Picture if you will the scene in the Boardroom when the “make up” question is raised – if it ever is. How much would it cost, this suggestion of returning to employees those increases that were lost during the dark times?  Management would consider that the tight fiscal measures put in place for Human Resources, as well as other functional areas, were necessary to get the company through a rough patch.  Now that better times are slowly returning it does make business sense to begin reducing those restrictions going forward or otherwise trying to return to normal operations.

The use of bonuses and merit increases will return to a greater extent in 2012, as will company matches for 401(k) contributions, but they will not be made retroactive.  They can’t afford to.  Companies will need to look forward, not backward.

To add incremental, unbudgeted funds to reinstate missed salary increases from a prior year is not going to happen, as management has its hands full bringing itself back to a healthy financial posture.  Supplemental “make-up” compensation, especially in the form of fixed costs, would not be viewed as a financially sound strategy.

So stop asking and move on.  Your organization already has.

Whenever I ask a client to explain their view regarding the Return On Investment (ROI) received from employee compensation, from paying their employees, they always seem to react with a blank stare.  Is that because the question is unique, is confusing or perhaps simply an issue they hadn’t considered before?  Perhaps no one has ever asked them.

For some, employee pay is just there, like a budget.  They don’t qualify it.

They don’t get it

If you poke and prod a bit though, most will eventually stumble through a response.  They’ll tell you about turnover, that not many people are leaving, so that programs “must be working okay.”  Or maybe they’ll hand you the oft-used reduced merit increase story or perhaps mention a recent general adjustment or even a lower payroll rise percentage “during these difficult times.”

They miss the point.  And unless prompted by additional questions it’s fairly common for senior managers to complacently consider their prime compensation expense challenge is only the incremental cost of doing business.

Which means that when it comes to monitoring or controlling such costs the “pool” of money under discussion is only the annual increase budget.

Have a look.  If you compare your organization’s employee payroll against the impact of reducing the annual merit budget by even one full percentage, you will see how far off the mark the typical respondent is.  Focusing on the tip of the tip of the iceberg is nobody’s solution.

What I would submit to you is that every dollar spent for employee labor is a compensation expense. Using that premise a company’s labor costs represent over 50% of their revenue (excluding benefits).  In that environment the amount of the annual pay rise pales by comparison.  Sort of like a rounding error.

It’s not enough to look only there for remedies.

Trying a different tack

When I ask that same client whether their compensation program is working for them, I usually get served back the same befuddled look.  Eventually they’ll bring up their turnover statistics again, as if somehow that percentage (if being used as a metric in the first place) has a 1:1 correlation to compensation program success.

It doesn’t.

Managers, especially newbies, are often ill-equipped to understand the dynamics of their organization’s compensation costs, never mind monitor and control them.  This shouldn’t be surprising, though.  The steady stream of newly minted managers who are routinely given authority to spend the company’s money (hiring, promotion, pay rises, etc.) are continually thrust into that role without the benefit of relevant managerial training.  As a result these new managers often times don’t make decisions in the best interest of the company, but more frequently on the basis of subjective emotions, a desire to be liked, an exercise in personal power or for a host of other reasons that may or may not relate to an individual’s actual job performance.

Of course, the net result from these well-intentioned amateurs is the increased labor expense of running the business – in the form of poorly controlled payroll costs.  Money is not just being spent, it’s being thrown away.

This can be a huge problem for any organization (duh!), but you won’t get management to face the challenge and take the concrete and perhaps painful steps to improve until they are finally led to understand what constitutes the controllable employee cost of operating the business – and how to impact that expense.

Sounds simple.  Just point at the problem.  But ignorance, pain avoidance and a reluctance to make hard decisions are ingrained traits in many leadership circles.

Ignorance of the law is not a valid defense, I’m told.  Perhaps we should challenge our leadership, our management, to actually manage what could be the company’s largest single expense item.

It can be done.   Point to the numbers.

No one has ever said that management was easy.  When you’re responsible for a group of employees, no matter how many, experienced managers will tell you that they often find themselves walking a tightrope, balancing the needs and demands of the company against their own personal wants and those of their employees.  Think of a circus high-wire act, absent the flashy costumes and painted faces.

The left hand

On the one hand you have a manager’s natural desire to do “whatever needs to be done”  to make themselves and their staff (often in that order) a success.   These managers resist rules, guidelines or policies as an irritating limitation of their authority as the boss.  The “yield” sign waved by Human Resources or other observers is viewed as a barrier to getting things done – a brake on immediacy of action – of decision-making.  These folks secretly wish that they could do whatever they wanted to, whenever they wanted.

Left to their own devices, when one with such a mindset considers an exception to policy or practice they tend to focus on the immediate problem (and person) in front of them.   Everything else is secondary.   When facing down a challenge, they may don a set of blinders that blocks their view of the unintended consequences of their actions.  They make not even care.

They plunge straight ahead to fix the problem.

. . . because they’re the Manager!

So when should these folks have to toe the line with company policy and procedures and say NO to an employee?  When does the manager have to play the bad guy?

The right hand

On the other side of the spectrum are those who follow the rules (policies, procedures, etc.) to the exclusion of common sense, reasonable judgment, or emotional considerations.  Similar to the Left Hand managers they too have an immediate problem to solve, and may don their own set of blinders, likewise blocking their view of the unintended consequences of their actions.

They support the organization’s need (monitored and administered by HR) for standardization, internal equity and fair treatment of all employees.  There are rules out there, and independent discretion (latitude to act as one sees fit) is often seen as a risky business.  Because it’s easier to criticize the rule-breakers, than those who toe the line.

These are the bureaucrats, the ones who can and will quote company policy, whose eyes glaze over when asked for an alteration of the rules.  You’ve seen this type of behavior at the post office, at the Department of Motor Vehicles, or at customer service desks across the country.  You’ll find this type anywhere you travel.

The “yeah, but” moment

Practitioners will tell you that compensation programs always need a safety valve to account for exceptional circumstances, for times when the rules shouldn’t apply.  Without them, an overly rigid and inflexible system would break down into chaos and a myriad of conflicting independent actions.   However, those circumstances, and the desired exceptional solutions put forth by even the short-sighted and the self-absorbed, should be vetted by the appropriate level of authority.  Visibility and open action (transparency) is key to effective flexibility.

Hopefully when the time comes for the manager to support the company position, the response is more helpful than, “HR told me,” or “I wanted to do X but HR wouldn’t let me.”  Managers shouldn’t pass the buck or the blame, but be part of the management decision.  After all, they are management.  They agreed to play that role when they accepted the job.

For their part employees expect fair and equal treatment, which means consistency of action by management.  This also means employees don’t expect a “let’s make a deal” environment where decisions may depend on who you are, or on who or what you know.  It means that managers shouldn’t be playing fast and loose (doing whatever they want to, whenever they want) with policies and procedures.  These actions set precedent.  Therein lays chaos, which can destroy an organization from the inside.  Even the perception of arbitrariness can broadcast a negative message that will resonate poorly with employees.

Managers can choose to ignore one side (hand) and focus on the other, but only at their peril.  Because a rigid fixation on any solution, used every time, doesn’t reflect well on the flexibility of circumstances.  Life is not so cut and dried.

Taking the straight and narrow

If the manager does decide to make an exception, that break from the norm should be for well-considered reasons.  It should have the right upward approvals, and should  – if necessary – be explainable to other employees.   This insures that the decision is not viewed as arbitrary and capricious.

Safety valves are important, because there are always going to be reasons to make some exceptions.  But proper consideration and transparency should still be applied, even when the circumstances are confidential and no one else’s business.

What’s the right exception to make?  It depends.  There are no rules covering specific circumstances, and I wouldn’t think to prejudge.  But when you ‘re ready to go down that independent pathway -stepping away from standard  policy or practice – whether you’re the initiator or the approver, be aware that employees are watching.  The exception should be visible and acknowledged, not hidden from view.

From the viewpoint of those around you exceptions can make you either a hero or a goat, or maybe both – it depends who is watching.

Meanwhile, effective managers will continue to navigate that tightrope.

No one has ever said that management was easy.

As a manager within your organization you are expected to provide leadership and direction for those employees who report to you.  Likely that requirement is a key accountability in your job description, and fulfilling that mandate means that you’ll have to make decisions that impact your employees – for good or ill.

Bummer.  Not everyone is comfortable with that part of being a Manager.

From the senior management perspective a key leadership expectation is the matter of employee performance review – and future pay (reward) actions based upon that assessment.  The bosses have placed the ball squarely in your court to render those decisions.

Well, are you a tough manager with high expectations, or do you have a “rep” as an easy rater – as someone easy to please, someone who hesitates to make up or down decisions about their employees?  Do you feel that all employees deserve an annual raise?  Are you reluctant to choose?

Perhaps you have a tendency to make your decisions based on emotional factors (employee needs and wants), versus on the basis of business-related practicalities (performance assessment, company affordability, most deserving, budgets, etc.)?

Well, you probably say, the truth is that it’s a matter of balance; that managers need to weigh both factors (employer and employee) in trying to do the right thing.

True enough in concept, but . . . a balanced approach suggests use of a carrot and a stick.

Signs of the “softie”

When it comes to doling out the company’s money easy-to-please managers believe in giving as many employees as possible as much as the company allows, with the expectation that recipients will:

•    Be grateful and work harder out of personal thanks

•    Be satisfied and not leave

•    Appreciate your efforts on their behalf

These managers wear rose colored glasses, kidding themselves, thinking that their emotional pay decisions are going to deliver results that help them (the manager), and maybe even the organization (there’s that unfortunate priority again).

Why do managers make emotional decisions?

Managers have a choice, and what unfortunately comes naturally for too many untrained folks is the tendency to protect themselves.  Many still think of themselves as supervisors, not members of the organization’s leadership cadre.  In simplistic terms they still take the so-called “employee side,” versus the “company line” (and that’s how they see it).

•    They want to be liked.  They want to be a friend as well as a boss.  They still remember sitting on the other side of the desk.  So they empathize.

•    They don’t want to make career-impacting decisions.  They’d prefer that someone else play judge and jury with an employee’s career.  Or let the performance figures speak for themselves (“numbers don’t lie”).

•   They don’t understand (or defend) the company’s pay program.  These are the ones who tell employees, “I wanted to do more, but HR wouldn’t let me.”  They fail to defend company policy on rewards, preferring to be seen as on the employee’s side.

•    They’re afraid that someone would quit – because that might be a reflection on them as a manager.

•    It’s really about them.  Having employees unhappy for any reason usually means more work for the managers themselves.  It could mean extra attention to subordinate work (vs. their own), training replacements, doing the work themselves to fill in, etc.

These managers are not helping the organization; they’re not even managing.  What they’re doing is administering the pay programs as if they didn’t have a balanced decision-making role to play as part of the leadership team.  It’s managing from a distance – being the disengaged leader.

For sure it’s not easy for some new managers to “flip the switch” and start thinking like one of the leaders of the organization.  But when they took on the mantle of “manager” they stepped up to additional responsibilities.  They’re no longer “one of the boys,” but now the boss of those “boys.”

Those who wear rose-colored glasses to make reward decisions are in truth ineffective managers, who over time will harm the organization through their inability to make effective, objective decision-making.

It’s likely that your pay-for-performance program has a fatal flaw built into it; an inadvertent side effect of the design that, if ignored by management will almost certainly guarantee failure.

But no one wants to talk about it.

Instead, what you’ll hear is a steady drumbeat of, “Oh yes, we have a pay for performance program.  Employees are rewarded on the basis of their performance.”  But what if those merit increases won’t be enough to move an employee from low in their salary range up to the midpoint, the “going rate?”  What if merit increases alone won’t assure competitive pay?

The problem

Over time increases to the external marketplace will outstretch the company’s ability to reward performance – to keep pace.  The company can’t keep up with increasing market values and often enough new hires will find themselves paid more than current experienced employees.

The company usually describes their midpoint as associated with the market “going rate.”  Given that, then any employee who has performed their job responsibilities for a set period of time without performance criticism will reasonably expect that their pay rate should at least equal that market rate.

That sounds like a fair and reasonable expectation.

When that doesn’t happen though, when individual pay remains below midpoint / market, the employee’s disappointment over perceived unfair treatment can fester into lower morale and disengagement, which in turn often leads to separation.  If the employee is a high performer, the company has just suffered a significant loss.

Doesn’t happen here, you say?  Then test yourself.  Ask Human Resources how their pay-for-performance system works over time, over several years.  Ask them how they’re going to move a new employee’s pay from the minimum or low end to the midpoint value.

I wonder what they would say.

Look at the numbers

Let’s look at an example: say you’re hired at the bottom of the salary range, at $80.  The midpoint is $100 and the maximum is $120 (typical salary range width).  Your compa-ratio is 80%.  After three years with the market / midpoint rising at approx. 2.5% per year, the $100 has become $107.70.  Meanwhile, let’s say you’re performing well, receiving 4% annual increases.  After three years your pay is now $90, and your new compa-ratio is 83.6%.

If you believe that three years of satisfactory (or better) performance has brought you to a point where you are thoroughly familiar with the job, and therefore should be paid the “going rate,” guess what?  You’re still over 16% below the company’s midpoint.  You’re nowhere near competitive pay.

And if you’re fortunate enough to receive a promotion?  Chances are your present 83.6% compa-ratio will likely have you starting the new job similarly low in your new salary range.  So the self-defeating process starts once again.

But what if you’re not promoted?  How many more years will it take to get you to competitive pay?  Are you willing to wait that long?  Or will you become another statistic in the company’s turnover rate?

The causes that make the effect

This doesn’t need to happen, but all too often does.

•     When a company is caught up in an “everyone deserves a raise” mentality, there isn’t enough money left over to properly reward the higher performers.

•    Many companies don’t provide significant reward differentials between performance levels.  Is 1% or 2% enough between your stars and “Joe Average?”   Are you motivating through pay, or simply administering?

•    When managers fail to consider employee contributions vs. the evolving competitive market.  When decision-makers ignore external realities and instead focus solely on internal balance (equity).

•    Merit budgets are not designed to address the issue of “market creep.”  It’s as if the company presumes that the external marketplace isn’t moving ever higher.

With the above as backdrop an organization’s internal pay practices can easily become disconnected from an employee’s market value.

Not many companies recognize this inherent flaw in their pay-for-performance program.  Individual managers may notice the inherent weakness, but most organizations tend to turn an official blind eye.  Granted, most don’t have the extra money that would be required to jumpstart employees to match their growing marketability.  They don’t have the money to be fair to everyone; it just costs too much.

Instead, they prefer to take one year at a time, all the while telling employees that the merit system works.

That’s where the cynical viewpoint of some employees is created, suggesting that quitting and getting rehired is a sure way to get the money you deserve.  It’s a risk, but I’ve seen that tactic work.
What can you do?

Build a ring fence and maybe they will stay

Develop a Ring Fence: identify your key employees and make sure that they are both competitively paid as well as appropriately paid for their value to the organization.  Build a protective “fence” around these employees, similar to “franchise players” in professional sports.  These are the ones you can’t afford to lose – so keep track of their compensation packages.

Then every year review your entire staff.  Who is paid properly and who is not.  Having this knowledge is half the battle, halfway toward a solution.  Because from this point individual corrective tactics can be devised.

Caution: you may have to forgo some increases for “so-so” employees.  Can you do that?
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The merit pay process usually works well for one full cycle, but for the long term the mechanics don’t provide the compensation level that the employee is worth.   Management touts their merit reward programs as a one-time event, but over time employees will see the fly in the soup, that unless one gets promoted on a regular basis the “system” actually works against you.

But no one wants to talk about it.

Bob has just turned in his resignation, handing you a paper with a single line of text; he was leaving in two weeks.  Cripes!  Bob is one of your best team leads, and his departure will leave a hole in your department that will be hard to fill, especially in the short term.

Is there anything you can do?
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At this point the question of a counter offer will pop into every manager’s mind who has ever faced this dilemma.  Give Bob what he wants and he’ll stay – right?  Find out what’s been offered and promise the same.   Problem solved?

Not by a long shot.  It’s not that simple.

Bob may or may not decide to stay, but meanwhile other discontented employees will note your response, the relationship with Bob has already been damaged by his resignation, and any new “arrangement” might create internal equity trouble.  Productivity and morale could be impacted, no matter what happens to Bob.

Your solution might create even more problems for you.

What to do?  Let’s look at the implications of a counter-offer from both sides.

The Employee Perspective

If an employee has made the decision to leave, and subsequent actions have progressed to the point where an offer has been received, then mentally they have already left.  Any internal debate they might have had over making a change has already been resolved, and they are comfortable with their decision.  They may even be anxious to leave, as the new employer offers a fresh start, with new challenges, new faces, increased responsibilities and of course more money.

They may be enticed to stay by increasing their rewards package, but you can’t be certain.  Their true motivation may remain an unknown, leaving you to deal with only what they are willing to disclose.

If the key catalyst for resignation is not rewards (i.e., friction with the boss, perceived dead-end job, dated technology, long commute, too much travel, etc. etc.) a counter offer focused on more rewards will miss the mark.

The Employer Perspective

If you extend a counter-offer, it will become known and discussed.  Employees may get the idea that such is the way to get a better deal with the company – by threatening to quit.

Those who accept counter-offers often leave within 6 months anyway – that’s all the time you’ve bought for yourself, as other unresolved issues would remain sources of continued dissatisfaction.   More money will not solve those problems, and typically counter-offers address only the quick fix money issue.

Once an employee has resigned, even if later rescinded, their relationship with the company is forever altered.  It’s unlikely that the company will retain positive thoughts about the individual, even if the immediate manager still loves them.  Career prospects will have taken a body blow.

If you extend a counter-offer and it is rejected, the same internal damage will be felt as if it had been accepted – so you better be careful before extending yourself.   In any case, the employee is no longer considered loyal, and cannot be trusted to remain longer term.  They are considered “for sale.”

Could This Work For You?

If an employee tells you they are thinking of leaving, vs. actually having an offer in hand, then you have more room to maneuver.  But the company should examine how they deal with threats – because other employees will be watching.

However, if your world will end if Bob leaves, or you need to buy time until a replacement can be put in place or a project completed, you may wish to consider negotiations.

Caution:  line managers may advocate a counter-offer more because their lives are made difficult by an employee’s departure, rather than the business impact of the separation.

Doing It Anyway

If you are planning to make a counter-offer, prepare yourself in advance by:
•   Learning the nature of the offer you are competing against
•    Ensuring your period of vulnerability is minimized
•    Developing  a backup employee as soon as possible
•    Deflecting employee criticisms over favored treatment, dangerous precedents, etc.  Word will get out, so you should have a story ready that rationalizes your decision.  You don’t want to face a host of “what about me?” calls.

For those companies who may have a policy that allows managers to consider counter-offers, the approval process should be visible enough to ensure that the broader issues of business justification are discussed.  Personally affected line managers should not make the call.

A final caution: like a fine aged whiskey you should only sip at this practice and savor the mutual gain, not gulp it down and feel the burn.