There’s this big insidious lie that everyone has fallen for. It’s been embedded for generations and we’ve even created all these rituals around it. Supposedly it makes everyone feel better and we have to keep up the charade for the sake of humanity or something like that.
I’m not talking about Santa Claus or the Easter Bunny or even a functional government.
We’re talking about “Pay for Performance” here.
You don’t pay for performance with base salaries in your organization. You can’t pay for performance with base salaries in your organization. Most importantly, you shouldn’t even want to. You shouldn’t believe the myth. To debunk all this, we’re going to need a real and uncomfortable conversation about the facts of life. Think of it as the birds and the bees of business.
The Four Truths of Pay
In the real world, raises are directly affected by four specific and rank ordered variables. These apply regardless of location, industry, or organization size.
1. The Pie
The number one thing that affects an individual’s raise also happens to be pretty much out of their control: The Organization’s Budget. Think of it as a pie and everyone is getting a piece. To figure out how big of a slice someone is getting, you have to first determine how big the overall pie is and how many it must serve.
Unfortunately in times of economic crisis, that pie gets mighty slim. With many companies recovering from the fall out of 2020, that may mean there isn’t enough pie to share around. What happens to “pay for performance” then?
The reality is that we keep our good performers around. Slackers and dead weight get laid off. If you try selling survival as just reward, however, you’ll likely experience more than a little backlash. The surviving employees have been picking up all the extra slack, working harder than ever to keep things running as smoothly as possible. Their performance has arguably gone above and beyond, in most cases. Shouldn’t that mean they absolutely must have a raise?
The short answer is no. Budget wins out over any other variable, regardless of how hard anyone has worked.
That being said, companies must always take care to monitor the market. You don’t want to lose your best talent to a competitor that pays just a bit more. It may be painful, but could be necessary.
2. The Golden Ratio
After budget, the next most important variable for raises also happens to be completely out of the individual’s control: The Compa-Ratio. This is the amount you pay an employee already compared to what the market is for that position. The higher the ratio, the smaller the raise.
Of all the principles, this is the one that gets violated the most. Pay for performance goes directly against this common sense variable. When you tie performance to increases and skip over the Comp-Ratio, you’ll eventually price yourself out of the market.
The first nine years of my career were spent working HR at one of the most profitable companies: Exxon-Mobil. They made salary decisions based on Compa-Ratio because they knew that was the only sensible and sustainable way to do it. If they knew they couldn’t afford to ignore the Compa-Ratio, how can you?
3. NOW Performance
Assuming your organization has the budget AND your employee has not out ran their salary band compared to market, the third most important factor in determining increases is performance. If you were looking for it, there it is. FINALLY a variable that the individual CAN affect. Just remember that this is third down on the list for a reason.
More importantly, you need to tread very carefully here. If you imply that their performance was the biggest factor in their raise, what happens when uncertainty strikes and the budget vanishes?
Consider the longevity of this approach too. Retention is vital for the health of any organization, but it becomes a problem if you’ve tied performance to pay. Those hard working and highly skilled senior contributors that stay with you will eventually approach the end of their compensation band. That long time team member is not going to want to hear about reality after years of being sold on a more pleasing mythology. Even worse, they may feel that you’re taking advantage of them based on age. If you’re lucky, that means they’ll only become lackadaisical. The unlucky ones end up on the painful end of a lawsuit.
4. The Promise
The final factor that influences annual compensation treatment is potential. Does this person want more responsibility and are they good enough to earn it? This looks directly at your talent for their ability to and probability of climbing up the ladder. With the potential there, it’s possible to move briskly across a pay grade and attain the maximum of that range in anticipation of jumping to a higher level.
Potential is a short lived impact though. Most workers have a limited number of rungs they can climb on any given ladder.
Long story short, base salary administration is not and cannot be sexy. It should be clinical when performed properly. The controlling influence of 1) Budget, 2) CompaRatio, 3) Performance and 4) Potential are universal facts of life. The sooner we have that adult “birds and the bees” conversation with our workforce, the sooner we’ll have employees with realistic expectations and a working understanding of reality.
How do you debunk The Big Lie?
1. Create and Calibrate a Multi-Tiered Compensation System. You’ll want to do this by utilizing the correct Applicable Labor Force data and properly tailor your jobs to fit your population. If you don’t have an in-house expert, find an external professional to contract.
2. Adopt a Clear and Cogent Compensation Philosophy. Choose one that is grounded in reality. My universal favorite is extremely simple and I’ve used it for dozens of organizations: “We pay you fairly for what you do.”
3. Create Salary Administration Guidelines. Provide clear written instructions to supervisors and managers on how your system works. Train them to be able to both use and explain it.
4. Develop Compensation Conversation Templates. These cookie cutter documents should empower a manager to properly communicate an annual raise (or lack thereof) in sixty seconds or less. If you’d like a free sample, click the button to download those. No sign up or email required.
5. Leverage with Bonus and/or Profit Sharing Programs. Craft incentive plans to reinforce and reward more directly for performance. Be careful, however, not to suboptimize by encouraging managers to drive up numbers in their individual functions at the expense of the greater good.
Garold (Gary) Markle is the creator of Catalytic Coaching and author of Catalytic Coaching: The End of the Performance Review. He brings real world experience from 17 years in HR leadership in major corporations coupled with 20 years of teaching small and mid-sized organizations how to cultivate their leadership and ditch their detrimental performance reviews for a proven Coaching process.
Book Gary to speak to your audience about speeding your pace of significant change.
