Compensation is always a trade-off.
Once you come to terms with the fact that compensation is always a trade-off and never perfect, you are released from trying to justify compensation decisions. Wouldn't it be wonderful not to have to justify? I have coached many people on how to handle tough compensation discussions. It is rarely rewarding for either party.
In my last blog, "Performance Management is so Yesterday", I talked about how current performance management systems sap motivation and are often "widely inaccurate". I suggested changing to a true "coaching and development model". In this model conversations are frequent and focused on support and problem solving and not on assessment and ratings.
This blog resulted in lots of comments -- the vast majority of comments were supportive. Here's a sample.
"People are tired of the way we do performance management. It is cumbersome and the conversations are difficult." "It is unheard-of for the hockey coach to play his team for half the season and then sit down and spend an hour telling each player what he or she did right and what needs to be improved. He needs to be talking to his whole team and each of his players continuously."
I share this hockey analogy comment because it highlights how ludicrous our current approach is. I'll continue with this analogy as I move into the next question to be answered-- "if we can't rate them, how do we pay them?"
Back to what I opened with, compensation strategy is always a trade-off. Once we come to terms with this fact, we are released from trying to be perfect in our design and in our explanations of pay.
Compensation is simply the intersection of three factors. what the market will pay for the person and their skills, what the person wishes to be paid, what the organization can afford to or is willing to pay the person for their package of skills.-
Here's how it would work. Each person in an organization would present to their manager what they think their pay should be with supporting documentation (their view of the market, what others are paid within the organization). This would be real documentation and not hearsay. Each manager in the organization would be required to do their own legwork in determining fair pay for each of their employees. (Compensation people could be very helpful in supporting this process once they are freed up from managing cumbersome systems.) The manager and employee would meet, review all documentation, and arrive at an agreed salary level based upon the homework each of them completed. Voila-- no justification needed -- you don't close the conversations until you agree on a fair salary number that meets both of your needs.
This process would be relatively quick for more junior level jobs where you have many people doing the same job (salaries would have to be similar) and more difficult for very unique or very high level jobs. In truth, unique and/or high level jobs are essentially already handled this way.
Now to get even more radical - how about publishing salaries <>internally <>like Richard Semler did at Semco? We now publish the top 5 director's salaries in every public company. The door is open for this level of transparency. (Truth be known, people talk anyway and the grapevine provides very inaccurate salary information and this is just hurtful). Open salary systems create more information to inform the compensation discussion. You can agree to disagree but you no longer need to argue the facts.
If you haven't read about Semco, you should. Here's the wikipedia stub. And here's a ringing endorsement from 37 Signals, those brilliant guys who invented Basecamp.
Sound a bit like hockey? You spend the most time deciding compensation for your biggest contributors and you don't close talks until both parties agree. The best players are able to argue for the highest salaries and everyone knows what everyone gets paid which drives accountability and accuracy over the long run.
Ok, we've taken care of salary. What about bonuses? How should they work? Look for that in my next blog.
