Respecting the Limits of Compensation

by David Creelman | Posted | Total Rewards

Respecting the Limits of Compensation

Do you remember when the venerable American Compensation Association changed its name to WorldatWork? Did the name change seem odd to you?

I always imagined a CFO rubber stamping the membership fee for the Compensation Association, but questioning why HR was spending money on this thing called WorldatWork.

However, underlying this change was one of the deepest truths about compensation:

There are limits to what compensation can do on its own.

The people at the American Compensation Association recognized the limits of compensation and wanted to expand their scope to a broader range of things that attract, retain and motivate talent: including performance and recognition, development and career opportunities, and work-life quality. Given the limits of compensation, that makes sense.

What happens on the outer limits

Compensation that is either too low or unfair makes it hard to attract, retain and motivate people. Even if it's only perceived as being low or unfair, it can cause those same problems to occur.

The flip side however is not strong either. Yes, high base compensation can help attract and retain, but it generally cannot motivate; and retaining unmotivated people is hardly your goal.

Similarly, poorly designed incentive schemes motivate the wrong sort of behavior. Pump up the incentives high enough and lenders will make irresponsible loans, sales reps will game the system, and leaders will put a short-term boost to earnings ahead of long-term success.

Well-designed incentives programs can reinforce good behavior that flows from sound goals, good job design and solid management. But incentives work best playing a supporting role in motivation rather than a lead one.

Maintain a broad perspective on the role of compensation

Compensation managers live in a world of detail. At the same time they need to have a broad perspective on the range of tools available to address the sorts of problems managers bring to HR; otherwise the relentless pressure to make short term compensation "fixes" will only prove that compensation has the power to do harm.

And managers will ask HR to use compensation to solve problems in a way that ends up doing more harm than good.

The types of pressures that get compensation into trouble are:

  • A manager is worried about losing one person and wants to use high compensation to retain them. Doing so may be unfair to everyone else, unleashing a mess of other problems.
  • A poor manager cannot get his or her people to perform and wants a pumped up incentive scheme to punish poor performers and reward good ones. Doing so pushes employees to game the system; angers honest employees who won't game the system; and does nothing to address the underlying causes of poor performance.
  • Managers may favor big annual increases to base pay because it makes attraction and retention easier. Doing so can push payroll costs out of line, setting the company up for a crisis in the next downturn.

Compensation gets in trouble when people try to push it beyond its proper role of providing a supporting infrastructure.

Resist the pressures with a full set of HR tools

As WorldatWork recognized, the best way to resist the pressure on the compensation system is to have the full set of HR tools at hand when managers come with a problem.

Managers need to be shown that there are many tactics for addressing issues including:

  • coaching
  • job design
  • goal setting
  • flexible hours
  • organization structure
  • training
  • team building
  • better hiring
  • appropriate tools
  • smart workplace design
  • better processes

Then they need to be shown that the knock-on effects of a pay change create unacceptable risks.

The primary role of the compensation manager

The primary role of the compensation manager is to defend the integrity of a well-designed compensation system that, like any good doctor, first and foremost does no harm.

Even the best compensation system will have its shortcomings. Do not let those shortcomings become an excuse for undermining the integrity of the system or replacing a good system with a worse one.

There are a few core truths about compensation:

  • It is essential.
  • It has to be done right.
  • It is a lightning rod for criticism and is pressed towards trying to solve problems it cannot solve.

Compensation is an essential infrastructure that holds the company up. Pushing it beyond its proper role - failing to recognize the limits of what it can do - is the cause of most of our reward problems.

Pay for Performance Best-Practices

Learn more about how to design an effective compensation system that motivates high performance.

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Cover of the book
Cover of the book

Pay for Performance Best-Practices

Learn more about how to design an effective compensation system that motivates high performance.

Read Now

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