The accuracy illusion

The more things change…

When I started my first job two and a half decades ago, I was told for the first six months (during “probation period”) my pay would be set at 90% of the starting salary. Following a positive evaluation it would be brought to the “normal” level. Besides being market practice (as I was assured by friends experiencing the same thing) I felt it was fair since I honestly expected to be performing and contributing slightly below par during my on-boarding and assimilation time.

I was further told there was a “midpoint” (or target) and maximum salary for my job, which I could expect to reach — depending upon my performance and general development  — after a period of 4 to 10 years, or 7 to 15 years, respectively.

In my second job I became eligible for a bonus — a part of my annual salary would be dependent on whether, or to what extent, the company and I achieved our respective objectives.

Interestingly, the basic premise from which both guaranteed and variable pay started was — and still is — the same:

There is an ideal fit/performance which warrants an ideal guaranteed and variable pay.

Fast-forward 25 years: Multiple crises, collective dismissal waves, dodged Y2K doomsday scenarios, dot-com hypes, burst housing and financial bubbles, wars-for-talent, a multi-generational workforce, and a changing work landscape, etc. Seems everything has changed — except for the eternal formula:

Managing base pay

The practice of gradually moving employees’ salaries based on some form of performance rating suggests that — even in today’s volatility, uncertainty, complexity and ambiguity — we believe:

  1. We can typically determine the “ideal” salary for every job.
  2. An employee’s past performance is an indication for his/her future value.
  3. We can judge with astounding accuracy how any performance should position an individual employee against the “ideal” profile (and salary). Indeed, rather than just indicating “below/@/above” we pinpoint — through the individual’s “comp-ratio” — an exact position on a 40-point/50-percent-scale (or more in developing or volatile economies).

Now add to the mix limited budgets and a culture of entitlement — obliging us to recognize every individual’s performance or growth in the past year. What comes out is little to no differentiation in pay increases. Salaries “creep” along the scale, often reflecting little more than the passing of time.

Setting bonus targets

There is a practice of tying non-sales targets to role levels or grades rather than jobs

When it comes to non-sales variable pay targets on the other hand, companies tend to be less specific. In fact, the practice of tying non-sales targets to role levels or grades rather than jobs would indicate we believe that performance has equal relative value for all roles of the same level/grade.

In those cases where a company differentiates targets at role (or even individual) level, this is usually driven by market practices and/or employee expectations, not necessarily because of a deliberate strategy.

Possible alternatives?

The business landscape is changing, and reward models should be flexible enough to accommodate change. Such agility sometimes comes with giving up on perceived accuracy. Even if we ignore obvious issues with today’s base salary management practices, the mere fact that jobs in companies constantly evolve, makes accuracy an illusion.  The emerging of specific hot or scarce skills and the impact it has on the availability —– and consequential quality and accuracy — of market data to determine “ideal” market value just places more stress on the system’s sustainability.

So, if we’re not going to give up on it completely, then perhaps we should consider changing some of the features. Unfortunately, when the going gets tough, most companies tend to fall back on legacy solutions, rather than developing, testing or adopting innovative approaches. There ARE other options, though.

Salary adjustments could be restricted to a limited number of sizable “steps”

One alternative is that salary adjustments could be restricted to a limited number of sizable “steps” (below-@-above), rather than small increases along a continuous scale. Gradually moving from an entitlement culture to one where measurable differences are (financially) recognized, and other elements of the Employee Value Proposition are used to address loyalty and continuous effort.

Another option is to set part of the merit budget aside for broad-based market increases to all employees*, using the remainder to recognize skills growth or specific milestones/events achievement is another possibility.

And what about variable targets? Based on findings from our 2016 Belgian General Industry Survey, which included responses from more than 130 companies, a staggering 78.6% indicated these were annual base salary structures (rather than total compensation which we would typically recommend as a more appropriate basis for managing pay).

Although the concept of managing total target reward is not a new one, too many companies are still stuck in that duality, and continue managing both elements separately.

Even then, variable targets don’t have to be tied to grade levels.

A change in view?

Perhaps it’s about looking at pay-mix (relation of base versus variable target) differently.  An alternative for determining the ideal pay-mix could be the value/performance segment of a role. For certain roles, a small improvement in performance delivers a disproportionate return in value for the company. Other roles have a steep value increase as initial performance grows, but “plateau” rather quickly after which improved performance doesn’t create additional value.

A lot of roles, however, almost immediately require an “efficient” performance level to sustain the business’ operation model, as  differences in performance won’t significantly impact business results however. Operating a different pay mix for each segment seems to be a logical consequence.

Whatever the “solution” — and it will be different for each company, segment, stage — chances are it will be different from today’s. Just like your job, function, company, industry will be.

(*obviously excluding clear cases of non-growth or -contribution)

About Ralph Leyssens

Ralph Leyssens has over 25 years’ experience in international reward consulting and management. He specializes in…
Categories: Compensation, Health and Group Benefits | Tags: ,

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