Let’s break this up into the familiar parts: Why, how, what. I’m not going to waste a lot of time writing an introduction because you’ll skip it anyway. That’s also why the picture of a lion a bit further down below is also completely irrelevant. Just had to grab attention. Just wanted to note that this post won’t give you the final answer, but it will help you a whole lot if you’re willing to put in some mental work.
👫 This post is aimed at
HR-minded people who are in charge or are very much involved with compensation & benefits.
📖 After reading
You will be able to set up a stronger and more future-proof com & ben model.
Why — the value proposition
When designing a compensation strategy, this is honestly the most important question to ask. And I don’t mean you should ask yourself “why do we need a compensation strategy?”- I mean, duh. But ask: “Why would people really want to work for us?”. In other words, what’s our employee value proposition? And not the soft-marketing kind, but really your employer strategy. There’s a simple (≠ easy) strategy exercise that looks much like the layout of this blog post that’s called “Who, what, how”. Ask your HR team to really think about these questions: Who do we want to attract? What will be our value proposition? How will we deliver on that value proposition? For example, for us at INTUO it looks very much like this:
Who? Independent, ambitious people with a great sense of purpose that have tremendous growth potential (regardless of age)
What? More impact, ownership, and growth than elsewhere.
How? By growing faster than average companies, we’ll need them to grow fast with us and take up roles and responsibilities they wouldn’t get elsewhere. Learning by doing (and by making mistakes). That and we have an appealing mission statement.
Grooowl (if you didn't read the intro, you won't get this)
Once you’ve defined your employer strategy, you can now derive more or less how you want to reward them. Firstly take into account these basic principles before answering the questions below.
- Payment is all about perceived fairness. That’s actually the only important thing. If everyone feels like they’re paid in a fair manner, nobody will leave and everybody will do their job. It is NOT about motivation or about rewarding (despite the name). It’s about fairness, and fairness alone. Take for example the story of Gravity, the company that decided to pay everyone $70.000 (the limit after which the correlation between money and happiness is not that obvious anymore). Quite soon after launching that strategy, two high-performers quit, because, even though they made more than they used to, they felt like other people around them were not entitled to the same pay they had. It felt unfair.
- Laszlo Bock wrote: "pay unfairly". What he meant was: pay unequally (and I don’t mean based on someone’s gender). And that’s completely true. You shouldn’t be afraid to pay people that have tremendous value for your company a whole lot more than others. Others that work with them will most likely understand and won’t even mind. Paradoxically this actually increases the perceived fairness. The only difficulty is that on average, most people think they perform better than average. Just like most drivers think they can drive better than average. So if you can double check the top-performer identification with an HR Business Partner or with a team, please do.
- Finally, remember that paying for value is more important than paying for performance. Unless it’s a bonus, a bonus can be used as a motivator or rewarding tool, but only in the right scenarios where input and output are clearly linked (e.g. sales, top management, simple tasks...). If you pay for performance instead of value, the following happens: Marie has been working hard all year and get’s a performance score of 4 out of 5. Even though she’s one of the few that got a 4 (let alone a 5), she still feels like she’s given it all she’s got this year and gets the feeling the company doesn’t appreciate her efforts all that much. And it’s not just about the score, it’s about the fact that you expect a pay-raise instead of a job-well-done. Recognition should be done in the form of compliments, exposure, and pats-on-the-back, not in the form of a salary increase or a performance score.
Pay according to value, not performance
Right, so here are some questions for you to answer. Do not start thinking about all the details already, just answer with one to three sentences:
- What do we want to reward for? Hint: It should be based on value rather than performance if it's about a fixed salary.
- How will we pay compared to external benchmarks? Will you pay at 110% of someone’s capabilities or rather at 90%. At a startup, you usually pay under the average, because you can offer an amazing learning opportunity.
- Who do we want to give a bonus? Is it group-based or individual? Take into account that individual bonuses only work if the input is tightly connected to the output. Also, a bonus system should be strictly agreed upon beforehand. You don’t want any confusion about it.
Pay fairly first and foremost
Finally, let’s design your payment strategy. The idea of this exercise is to give you a framework and let you combine some elements to come to a payment-track. The combination of payment-tracks can make up your payment strategy. This is the framework. There are five decisions to make:
- Who: Who is it for?
- What: What will we take into account when making the decision?
- Input: Who will deliver that input?
- Final Say: Who will have the final say?
- Type: What type of payment-device do we wish to hand out. Points can be used to trade in for a bigger car or maybe another training (as a way to represent the flexible income plan).
Now the only thing you have to do is write down between one and five tracks that will cover your entire rewarding strategy. Check whether they meet your strategy, the general conditions, and your earlier decisions. If not, reiterate again. You can add other things like a car-upgrade in "Type" or top-performers in "Who". Go wild on your ideas, but try to keep the end result simple. And don’t forget to mention the frequency of your adjustments.
The framework for designing compensation tracks
The Old School
You’ll pay for performance mostly, put everyone through the same system and give managers the opportunity to hide behind that same system. “I can’t help it that they made me force rank on you”. Usually, they have a bonus for top-management as well, that’s administered by HR, but set by the business.
Classical, old school payment structure
The New School
In a lot of self-steering organizations, people can choose what responsibilities to take up for the coming year and will get paid out points if they can deliver on those responsibilities. HR/CEO is the one valuing the responsibilities.
One type of self-steering compensation process
The Simple School
You give everyone a group bonus and do special stuff for the top and bottom 10%. Focus on paying fair by looking at someone’s market value, but do something out of the ordinary for the top-performers and low-performers.
The simple rewarding strategy
The Consulting School
Where everyone is paid fairly compared to market value, but some people move up the consulting ladder because they show more value. A case can be prepared with the coach every quarter and is then presented to a committee of top-managers and HR that decide over promotions. Both the coach and the committee know what to look for in a consultant to see them move to the next level. If the committee’s decision was negative, the person can still prepare a new case for next quarter, because they will receive concrete action points.
The consulting way
The Management School
This is a typical scenario where the manager gets more responsibility in deciding how to divide their pay increases. Finance first gives a budget to HR, HR then assigns that to managers and does a suggestion for pay increase (based on data they received from other managers (performance snapshots) and sometimes the team as well). The manager decides how to divide it.
Where the manager gets bigger responsibility
intuo is not a comp&ben consultant, but we realize the importance of having all these operational factors on point. We have accumulated a lot of real-life experiences from several of our customers that managed to tackle this issue and then improve their culture with our tool. Talk with us and find out how they did it.
This article was originally published on the Medium account of Arne Van Damme