This blog is co-authored with Anna Abgaryan a consultant at The Human Well who advises clients on effective pay systems in multiple industries.
Reward programs should support business strategy right? But how many organizations have we seen stray from this path when seduced by the latest trend, off the shelf solution or a pay design that worked in a prior life. It’s easily done when overworked HR managers see a quick fix.
How an organization is managed establishes (by accident or design) culture, talent management process and pay practice. Tinkering with one will cause the others to change, or otherwise expect a conflict. Many compensation professionals will tell you that they can describe a company’s culture by looking at its pay system: how pay changes are determined and delivered. So it follows that changing the relationship intentionally may be better suited to achieving a business outcome.
Understanding the interplay between pay practice and culture and vice versa will help identify where change may help affect better business outcomes. Let’s take a look at some examples:
- Egalitarian cultures for example or unionized workplaces typically employ profit sharing and tend to have pay grouped closely for employees at the same level or doing the same job and see no problem with compression. Pay adjustments are awarded with little differentiation for individual achievement or reflected in profit distribution. Pay tends to be above market. Pay programs for these organizations should embody narrow ranges with a relatively short time to reach target. Internal equity and team effort are considered more important than market perspective. Communication emphasizes the importance of team work and values.
- Decentralized organizations where decision making is delegated tend to have often unrelated businesses as independent profit centers. They may also use a variety of pay approaches and structures that reflect the demands of each business. There will likely be differences across reward elements especially where talent is not shared, including incentive targets expressed as a percent of salary in one business or a fixed amount in another, guaranteed bonuses, retention incentives, dissimilar vacation policies, unregulated title conventions etc. – whatever is needed to meet the needs of the business. The pay program likely has wide ranges, no red circle policy, and a prevalence of “buying” talent because “growing” takes too long. Sign-on bonuses may be common for newcomers who may earn more than longer serving employees. Incentive plans will emphasize individual contribution. Policies and procedures will tend to change rapidly often with record keeping and payroll administration challenges.
- Strong cost management cultures can often be found where margins are slim and competition fierce and will tend toward below market pay that is unified and disciplined in its distribution. Title inflation and internal career growth will be common features and incentive payouts will mostly be self-funding rather than for achieving development milestones on the way to larger goals. Midsize companies and family businesses reflect this type of culture. Pay structure is likely to have multiple layers and overlapping ranges with minimum pay around P25. Incentive plans will be simple and based on positive financial progress and may not include all employees.
- Businesses that require constant innovation and changing roles and rapid internal mobility will have pay movement that is frequent and often not systematic. Spot bonuses may also be common along with broad banding or wider than typical pay ranges. The pay program will allow for considerable management discretion in pay decision making and broad position definitions for similar jobs that may have different titles. The job structure may include dual career tracks; for specialists with expert knowledge who deliver innovation and for those with managerial and organizational skills. Job evaluation gives extra weight to innovation and market pricing usually prevails over internal equity.
- Companies facing significant change need to rapidly acquire “ready-to-go” skills to meet the new circumstances and will not have the runway to be able to grow talent internally. Pay will need to be targeted at or above market levels to be able to attract the best with minimum delay. Sign on and retention incentives tied to completion of key tasks possibly several years into the future will not be uncommon.
- Companies in old line industries will have reward practices that signal to employees that their skills are becoming obsolescent and that their market value is in decline unless they can upgrade knowledge or technological skills. New employees with minimum expertise who are likely more productive, will attract higher rates than veterans.
Pay and culture go together like Peaches and Cream. Which takes precedence today or took the lead in the past is a historical fact. What is not however is whether your pay practices today continue to be the most suitable for supporting the culture that you aspire to and best suited to supporting your business strategy. Think of strategy as the bowl in which Peaches and Cream are served and the combination that best suits your palate.