How Free Agents Will Disrupt Your Pay Programs

by David Creelman | Posted | Total Rewards

How Free Agents Will Disrupt Your Pay Programs

To what extent is your pay program influenced by how free agents get paid? That is probably an odd question, and I won't expect a response other than, "Why is that an issue?" The reason it's an issue is that as more of the people doing work for your organization are free agents, rather than employees, free agent pay structures will necessarily have an impact on employee pay.

"Free agent" is a term for anyone who works for themselves and is generally synonymous with the terms freelancer, contractor and contingent worker. Sometimes the definition gets a bit fuzzy because a free agent may have an "employer of record" for legal purposes; however, I am less interested in definitions or legal contrivances than the fact that we have a category of workers who negotiate their own pay rates from project to project.

Free agent pay vs. employee wages

One big difference between free agent pay and employee pay is that free agent pay is much more individualized. One free agent may charge several times as much as another for work of a similar nature depending on their performance and specific skillset. With employees in a single job grade it is rare to have more than a 50% difference in pay between the best and worst performers, or between employees with the most in-demand skill set and least needed skill set. Just think about how Hollywood pays actors - it's got nothing to do with assigning them to a job grade.

The question compensation managers face is whether the relative narrowness of pay ranges, which has worked well in a world of employees, will come under pressure as star workers realize they could make much more as a free agent.

Long and short-term benefits

Another difference between free agent pay and employee pay is that the time horizon for free agent pay is generally pretty short: they do a project and get paid, that's it. This means that pay can vary from project to project as conditions demand. With employees pay the time horizon is long, and often includes "a career" as part of the reward promise.

Compensation managers need to sort jobs into three categories:

  • Jobs where a short time frame for the pay deal would work better because market rates may vary significantly over the years.
  • Jobs where the existing deal works well enough
  • Jobs where the long-term nature of the deal (e.g. we want to retain the person for many years) is critical.

Your organization may need different pay schemes for different types of work depending on how short or long a time frame is appropriate.

Non-monetary rewards

A final difference between free agent pay and employee pay is that non-monetary rewards often play a bigger role for free agents. A free agent may take a gig because it allows to work from the beach in Bali, or because it's a cool project, or because it will allow them to develop a new skill. It is often harder for an employee to finagle non-monetary rewards that make a big difference to them.

What free agent world teaches us is that non-monetary rewards can have great value; we should see if we can be more imaginative in how we deliver non-monetary to employees.

The final word

Where does this leave us? Well, first, don't panic. There is still a good deal of insulation between what happens in the free agent market place and what happens internally. Your pay can probably be out of sync with free agent pay for quite a long time before the effects are felt. However, just like a tiny leak in the roof will eventually damage the whole structure, so too free agent pay will take its toll on your pay system. It's a good idea to take a close look at free agent pay and begin to adjust your internal systems based on the lessons learned.

Look for my new book co-authored with John Boudreau and Ravin Jesuthasan: Lead the Work: Navigating a world beyond employment

Pay for Performance

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