Does Your Compensation Live Up To Your Culture?

Corporate leaders often make this comment when they’re asked about their workplace culture. But, guess what? No matter how often and how fervently they insist that they value their employees, many employees don’t agree. There’s a significant disconnect between the way they feel they’re valued and what management believes.

A Compensation Best Practices Survey, carried out by compensation software and data company, Payscale, delivered some hard numbers that prove the point:

• 44 percent of employers were convinced their employees felt they were paid fairly; only 20 percent of employees agreed.
• 64 percent of employers thought their employees felt appreciated; only 45 percent of employees felt that way.
• And a whopping 77 percent of employees said that the way compensation was determined was not transparent.

In an Ernst & Young survey, the top two reasons employees gave for having “very little” or “no trust” in their employers were financially related. In this survey, some 53 percent said that employee compensation was not fair while 48 percent said employers did not provide equal opportunity for pay and promotion.

All these numbers should ring alarm bells. If members of your team don’t think they’re getting paid what they’re worth, if they believe their work is not valued, or they say compensation decision-making is not transparent, they are likely to be disgruntled and demotivated

The financial impact of demotivation is significant, costing companies as much as $450 to $500 billion a year in lost productivity through poor performance and a high rate of absenteeism.

While it’s true that Millennials and younger generations place a greater emphasis on a company’s values and culture than their predecessors, they still want to be appreciated and rewarded for their contributions—which includes financial benefits.

But let’s get specific. If you value teamwork, why not award bonuses to individuals who unselfishly help their peers? If you value performance, don’t give everyone the same raise.

If you value creative thinking and innovation then basic remuneration, pay raises and bonuses should reflect performance in those categories in addition to the achievement of narrow, results-oriented metrics.

If you take pride in being a fast-paced, deadline-oriented entity always turning on a dime to make things happen for a client—it’s inconsistent to only have an annual pay review.

If the organization is expanding its sales organization, commission programs should be emphasized. If quality or efficiency are a competitive advantage, employee pay should support those initiatives. Says Ken Troy, Human Capital Services Director, at Grant Thornton, the seventh largest accounting network in the world, “By tying benefits and compensation to the organization’s culture, employees are hired and promoted who best support the culture and values. These employees become an organization’s leaders and shape its future.”

Major disconnects persist. Some 47 percent of organizations surveyed say that today’s strong job market has increased their turnover rate—but they’re not stepping up base pay to retain talent.

About half of companies agreed that compensation drives engagement—but only 26 percent changed their comp strategy as a result.

Lack of transparency is a big barrier. According to LinkedIn’s Global Talent Trends 2019 Report, only 27 percent of HR and hiring professionals say their company shares salary ranges with employees or candidates.

These are all critical factors because, as Payscale points out, “The way you pay says a lot about you as an organization. Compensation should be a reflection of and an extension of your culture.”

But who gets to decide pay levels? Frontline managers, who know their team better than anyone, often have considerable responsibility—except when it comes to how much their team members get paid. Only 12 percent approve compensation and 42 percent able to recommend compensation.

That doesn’t make sense when the right compensation strategy and structure can help both hire and retain great talent. And especially because the cost of labor is often a company’s single biggest expense, running anywhere from 15 to 45 percent. (Add in benefits and taxes, and that number goes higher.)

How do you develop the right compensation strategy? It’s challenging, for sure, because there isn’t a “one size fits all” solution. Market data, industry benchmarks, and application of best practices are useful, but also too generic. You cannot stop there.

When organizations invest considerable time and money identifying and building the right culture to give them a competitive advantage, but do not consider how pay plays a role, they miss a significant opportunity to reinforce and sustain that culture. While we love to say, “People join organizations, but they leave bosses,” compensation is often a major consideration. The number of employees whose reason for resignation was that they were offered higher pay elsewhere increased from 57 percent in 2017 to 65 percent in 2018.

Consider these four perspectives when designing your compensation structure:

Fairness:
You are never going to convince anyone that people are your most important asset if you do not pay them fairly. How do you accomplish that?

• Monitor the market frequently: Check annually what other companies pay and even more often for highly volatile, hard to fill jobs. Top performing, fast-paced organizations also deliver spot and project completion bonuses.
• Know what your mission critical jobs are: Pay higher for these.
• Reward superior performance: Have a solid talent review system in place to identify top performers, especially those in mission critical roles. (A-players in A-roles.)
• Correct imbalances: Conduct racial and gender pay equity analyses and take action where needed. And communicate those plans to employees!

According to the Payscale 2019 Compensation Best Practices Survey, 73 percent of organizations have a variable pay plan in place and 23 percent of top performing organizations have increased variable pay to improve retention.

Alignment:
Variable pay is only effective when there is close alignment with behaviors you want to drive and reward. Alignment needs to occur in three key areas: Is collaboration and teamwork highly valued, but your pay structure rewards individual results? Consider a team bonus. If the reward at the end of the project is individual in nature, employees won’t put the needs of the team first.

• Values: Incentivizing individual or team performance will drive very different behaviors. So will rewarding the wrong behaviors. You want to award top performance, but you also have to consider how numbers are attained. For example, do you have a manager who kicks their goals out of the water, but also has high turnover and lots of employee relationships issues, or a reputation for demotivation or harassing team members? Think about the message you send when this manager is rewarded handsomely. 
• Business Goals: Are you profit oriented, revenue driven, or innovation focused? It’s easy to say you want all three, but which is your foundation? If you are profit oriented, figure out ways to reward for achieving the KPIs that drive profit. For example, repeat business from existing customers is usually less expensive than acquiring a new customer. If that is the case, how can you reinforce this through pay?
  Revenue focused? What behaviors drive revenue growth? What is the relationship between customer satisfaction and revenue? How can you use pay to reward the right customer-centric behaviors? Innovation focused? Innovation takes time and requires risk taking. Do you punish employees for making mistakes or incentivize them to stick their neck out? Long-term vs. Short-term Focused: This may vary depending on the employee’s position but in general if we want people to focus on the long-term, incentives need to balance with that perspective. Equity, stock bonuses and grants, and gainsharing (a share of the value generated by performance improvement) are approaches for any level of employee. Executive compensation is more complicated and non-qualified multi-year vesting plans should be considered.

Transparency:
A lot of organizations say they have an open-door culture, or that communication is a core value. But is that truly the case? Pay transparency can create more trust and fairness. Younger employees often share what they make with colleagues anyway.

• Transparency does not mean you have to share how much an individual receives. It does mean sharing your strategy and rationale. In addition, most transparent organizations share pay ranges for specific jobs, finding this practice helps with career pathing. Finally, beware of policies forbidding employees to share their pay with colleague. Such policies are not only outdated, but illegal under the National Labor Relations Act.
• Help employees understand the concept of total compensation. Their pay is base pay, variable pay, AND benefits. Share this information with them, especially in this day and age of rapidly rising benefit costs. Benefit statements are an effective communication tool to do this.
• Look for ways to increase transparency over time. This does not have to be an all or nothing approach. There is a growing number of companies who do share individual pay information for a variety of reasons. Take a look at companies such as Buffer, Glitch, Whole Foods, and Starbucks.

When organizations consider pay as a critical component of their culture strategy, they are more likely to sustain the culture they have worked hard to realize.

Mykkah Herner, a compensation and human resources professional, puts it extremely well, “They say when you really care about something, you should put your money where your mouth is—and I totally agree. To be competitive, get the best talent, and really be a great place to work, organizations have to put their compensation where their culture is.”

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Jason is President/CEO and Chief Culture Officer for Ideal Outcomes, Inc., and author of Culture Spark: 5 Steps to Ignite and Sustain Organizational Growth. An in-demand keynote speaker, he is an authority on helping companies build strong, sustained revenue growth by empowering their employees and developing energizing office cultures.

During his career of more than twenty years, Jason has partnered with numerous start-up companies to help build solid foundations that have enabled them to become noted industry leaders. He has worked closely with established Fortune 100 companies to create Leadership Development Journeys. And he has provided thought leadership and innovative consulting services to a wide range of mid-size companies.

Connect with Jason: [email protected]