Pay the Person or Pay the Position?

We at Boxwood continue to appreciate the shifts in business today and how the recruiting paradigm continues its shift. While the word “hiring” is a single word implying a single action, in reality, best practice hiring has shifted and now has multiple facets. Integral to a successful hiring effort is compensation.

A good compensation model motivates the employee to deliver performance today but also motivates the employee to remain a contributor, also regarded as “employee retention”. If the business can’t retain good talent, it will forever be challenged to reach its potential.

Historical compensation models have been focused on compensation tiers tied to job titles with a heavily weighted base salary. Additional levels of responsibility combined with senior level job titles with higher compensation are a clear path for employee’s career development.

As business shifts continue, does today’s approach to compensation need an adjustment?

· Business today is less about long-term employment of 20 years and more about an employee who can solve the business’s problems today, maybe for the next 3-5 years.

· Business today involves a greater sense of urgency than in years past. There is less patience and a higher demand for obtaining results.

· Business today is more about delivering value and therefore, more about paying for performance.

Legacy compensation models have paid employee bonuses based upon the overall performance of the business. A good year means all employees can expect a healthy bonus. This is easy for the business to measure and easy for the business to reward the employees. While it is easy for the employer to administer, does it deliver optimal employee performance?

Why is this legacy model less than ideal today?

The legacy model is promoting mediocre or average instead of excellent or extraordinary. In earlier times of less business urgency, the mediocre factor was an insignificant issue.

Mediocrity is promoted when everyone is lumped into the same bucket. For example, if the employee is going to be awarded a bonus when the business enjoys an excellent year, how much of that business’s success did the individual employee personally influence? If the “average employee is receiving a bonus, does it encourage the average employee to strive for average? ”On the other hand, if the extraordinary employee is delivering extraordinary value to the business while other employees are not and revenue goals are missed, should the extraordinary employee NOT receive a bonus? When that happens, the extraordinary employee leaves and joins another business, resulting in an employee retention issue. Furthermore, when the extraordinary talent leaves a business, the remaining population of employees represent the mediocrity or worse.

The promotion of mediocrity can occur in one of two ways:

1) When extraordinary employees leave, the mediocre employees are the ones who remain.

2) When the same bonus is awarded to both average and extraordinary employees, the extraordinary employees no longer see the value and the incentive to strive to be extraordinary and they fall back to being mediocre.

The “paying the position model” could be likened to a socialistic approach in a capitalistic market. Paying the position suggests that all employees are identical in the contribution and their value. Clearly, they aren’t.

Since there has to be a better way, what is the path forward?

The challenge is to recognize solid employees for their solid value and recognize extraordinary employees for their extraordinary value. The challenge is also to identify under-performers.

The first step for a path forward is establishing that all employees are not able to deliver the same value. For example, some employees have more of a work-life balance than others. Some can work longer hours, weekends, holidays, etc. Some employees have more “gas in the tank”. Some employees are simply better performers and should be held up as an example of delivering extraordinary value to the business.

The second step is developing goals for each employee to individually contribute toward the company’s goals. As an analogy, think of it as a Roman warship with oarsman, sails, cannons and an army.

In the bottom of the boat are the rowers providing power for the boat to reach its destination. The goal of the warship is to defeat its enemy. To do that, it had to be swift and focused on attacking the enemy with its cannons and its army.

The job of the oarsman was not to fire cannons, steer the boat, or directly defeat anyone. Their job was to row.

For the employees in your business who need to row, they need to have goals and rewards related to rowing, not firing cannons or defeating the enemy.

“Paying the person” in today’s business model is equivalent to paying for performance. With the average employment cycle being about 3-5 years today, it could be argued that we are all really interviewing for our job everyday. From CEO down the chain, everyone needs to be delivering value.

The third step is to establish a compensation model comprised of a base salary plus a performance bonus. The ratio between these two will vary by company and industry. A best practices compensation model should be simple for the employee to understand, clearly defined and align the employee’s goals with the company’s direction.

We have discussed that not all employees are identical. Therefore, their efforts and their performance is not identical. Therefore their total compensation should not be identical.

Paying the person may sound like a more complex process than paying the position. When evaluating the two, it should be asked: “What if you don’t develop a program to Pay the Person?” The simple answer is: Can a business afford to be average or mediocre today?

 

By Bert Sadtler

 

By | 2017-05-12T13:49:10+00:00 July 16th, 2014|