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Separating Compensation Theory from Reality

Written by advance on . Posted in Human Resources, Management

Source: HRM Today
By: Chuck Csizmar

I once supervised a compensation analyst who had spent a great deal of time attending professional seminars and workshops to learn about Compensation, as part of her professional development.

One result of that education was a favored response when faced with a challenge at work; she would fall back on her class work experience by saying, “the greatest minds in Compensation say that . . . .“  It took a great deal of patience on my part to educate this part-time practitioner / part-time student in the difference between the classroom / textbook answer and the reality of the workplace.

A short while ago I came across an HR blog where the author was instructing readers in how to create a merit performance matrix.  Very good stuff, I thought, admiring the technical step-by-step instructions – except I knew from long experience that the procedure being described would never work in the real world.  Didn’t the author realize that?

While it’s very important to understand the technical foundations of compensation methodology and practice, first and foremost you need to anchor yourself in the real world, to know what will work and not work in your own organization – no matter what the finest minds in Compensation think.

Why doesn’t compensation theory match compensation reality in the workplace?

  • Business realities:  Management will typically know more about a particular business situation than you do.  What you’re able to provide to the decision-making process as a compensation professional is limited to your particular subject area, while management usually has the bigger picture – the perspective of multiple viewpoints. Your compensation advice may not fit their business reality, no matter how logical an argument you make.
  • Bias of decision-makers: Decision-makers may feel that they intuitively know the right approach to take (they’ve done it before, if-it’s-not-broke- don’t-fit-it mentality, a friend / relation / old college chum suggested an approach, etc.).  Perhaps they read an article and are now insisting on following the advice of an author who doesn’t have a clue about their organization’s business.  Years ago I worked for a company whose CEO forced HR to implement a particular benefit plan because he had read a magazine article.  It does happen.
  • Problem avoidance: Short of killing the messenger, one solution for management is to do nothing about a problem – you’ve exaggerated it, the solution costs too much, let’s wait and see, etc.  Senior managers can be like politicians when it comes to avoiding a big decision – until it bites them in the leg.  Good or bad, remember that it can be dangerous to your career if you try to force a decision.
  • Business culture or model: Some initiatives just don’t “fit” in your organization.  Managers with a relaxed organization style will not be interested in demands to document everything, standardized policies and procedures, or having approved forms for every possible use.  Implementing against the culture can be an exercise in frustration and futility.

Subject matter experts who instruct in compensation techniques should always remember to ground their instructions with a caution to students: remember to account for the reality of the workplace before taking a textbook technique to management.

Two examples:

1) Merit matrix:  When designing a pay-for-performance merit increase matrix the standard rule is to place the average increase percentage in the block populated by most employees (average performance and average position-in-range).   The reasoning for this technique is to better manage the costs associated with that year’s annual increase process.

Many years ago I followed that approach in my first compensation leadership role, and still have a little bump where my head hit the wall.

Here’s the rub: such a technique requires that the matrix change every year, as the analysis demands you annually consider where the population averages are.  But management will likely have none of that. They’ll want the same matrix every year, for ease of administration and communication.

2) Cost of living as a basis for pay increases: I once watched over a fascinating exchange on a compensation blog where the debate raged on for days over the appropriate formulae to use for calculating the cost of living vs. cost or labor as it affected the average pay increase that management would approve.  Each side provided formulae, charts, graphs and quotes from notable experts to press home their opinion.

The reality for this exchange is that management does not use the cost of living as a prime determinant in their decision-making.  They are more likely to roll their eyes at the technical debate and ask only about competitiveness and bottom line cost – and “why can’t we do the same as we did last year“?  If their decision relates to the cost of living in some way, that’s a convenient coincidence that they can use in their communications.

The contribution you can make to your organization is blending the technical knowledge (the how-to) with seasoning and experience to understand what will work for your organization, considering culture and management bias.  Technical knowledge will give you the same answer every time, but knowing how to use that knowledge like a craftsman’s tool to aid in achieving business objectives – that’s the key to success as a Compensation professional.

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