Compensation: It’s a Lot More Than Just the Cost of Labor

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A quiet revolution has been unfolding over the past 20 years or so.

There was a time when an employee’s salary was highly confidential. Employees were told they could be fired for simply discussing pay.

Compensation traditionally has been a backroom function. With an org chart, a survey or two and a pile of job descriptions, comp analysts had everything they needed.

Salary planning focused narrowly on the job, ignoring incumbents. Salary increases were ostensibly linked to performance but evaluations were perfunctory with minimal review. Salary administration was strictly an HR problem.

Job-based pay systems

The focus was on the job. Employees were paid for performing the job. Evaluation systems determine job “value.” Surveys are based on “benchmark” jobs.

Demands for “pay equity” and “comparable worth” compared the pay of male and female jobs. For years, pay increases were based simply on job tenure or increased living costs.

It was very impersonal.

Job evaluation originated in the era of scientific management. Detailed job descriptions controlled worker activities. Workers were replaceable cogs in the wheels of production. They were expected to do what they were told.

That changed but only slightly with the emergence of professional managers, jobs requiring college degrees, and pay for performance. “Merit” increases were typically in a narrow range. Few employees were denied an increase and that limited the dollars available for star performers.

Until recently the management of salary increases has been a low priority, with minimal oversight. Performance ratings and salary increase decisions were rarely questioned. Discrimination and bias were typically ignored.

End of the traditional salary model

All of that began to change with the 1990-91 recession. Corporate leaders looking to cut costs and improve results concluded traditional pay programs were overly bureaucratic, an impediment to change, and costly to administer.

The business community was ready for a new program model. The answer was GE’s version of salary banding. It provided far greater flexibility and significantly reduced administrative costs. But the bands in the early models were too broad, employers lost control of salaries, and as a consequence, ‘broad banding’ failed to gain acceptance.

Those early systems did, however, launch a trend away from the traditional model. Many employers now have fewer, wider salary ranges. The majority now slot jobs based on survey data. That represents a new understanding of  “fair pay.”

A related change that has not received much attention is a subtle shift from determining how much to pay a job to the pay for individuals. Another prominent trend contributed to the shift – the proliferation and mounting importance of knowledge organizations.

To borrow a phrase, the assets of these companies walk out the door every night. As with any asset, the goal is to fully utilize their capabilities. Increasingly employers have come to appreciate that in the right work environment employees are capable of performing at significantly higher levels.

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Individual skills and motivation matter – a lot. Media reports have quoted CEOs saying their best performers are worth ten or more time an average employee.

Meeting expectations to role model performance

With knowledge workers, the concept of a job with defined duties actually limits their contribution. Now employees are empowered to tackle problems, often with little or no direct supervision.

In dynamic organizations, ideas like functional silos and chain of command have been largely discarded. In some organizations employees no longer have jobs; they have roles delimited only by their capabilities.

Competency models now focus employee development on the skills associated with high performance. The best performers – the “A” players – are celebrated. The adoption of forced distribution rating policies may violate employment law, but the attention to the practice shows clearly the emphasis placed on rewarding the top performers. Simply meeting expectations is not enough.

Career ladders and individual development have become important to salary management. A goal is to reward individuals for developing their capabilities.

Implications for employees in the new salary focus

“Results” are still core concerns of course; performance goals are routinely defined for employees at all levels but with true knowledge jobs it can be very difficult to define expected accomplishments. Many cannot be judged using individual performance metrics.

The new focus in salary management has significant implications for employees. Now pay decisions are based on individual knowledge, skills and performance. Salaries have become a measure of an employee’s growth. They control their career progress.

Now the ready availability of salary information on the Internet enables employees to assess their pay. If they are dissatisfied with their increase, they can quickly learn if a better paying job is available. The availability of information forces all employers to consider the policies needed to remain competitive.

Research and anecdotal evidence confirms employees like the autonomy and the support for their personal development. When salary structures are illustrated, they may resemble those of the Baby Boomer generation but leading edge pay strategies are radically different.

Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He recently became the editor of the journal Compensation and Benefits Review. He also has an MBA and Ph.D from the Wharton School of the University of Pennsylvania. Contact him at h.risher@verizon.net.

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