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Implementing a Compensation System: You Could Wait, But...

A fascinating documentary aired on public television about Walt Disney from the time he returned from World War I until his death in 1966. Throughout his life, he was driven by his vision and passion. He was not overly concerned with convention and relied on his brother, Roy, to implement management controls that enabled him to fund his dreams and build a great company.

Leaders in many small to medium-sized companies are following their dream and share Walt Disney’s aversion to management systems and policies. Working in the field of employee and executive compensation, we often talk with business owners who are encountering organizational difficulties caused by the absence of a basic compensation system.  But when is it time to implement a more formal reward system? Following are some thoughts that will help answer that question.

What do we mean by a “Compensation System?"

Fundamentally, there are three elements in a sound compensation system. First, determine competitive rates of pay for the talent that is needed to reach the company’s goals. Second, develop a rational approach for establishing internally equitable pay relationships between jobs. And third, establish guidelines to administer pay.

Establishing Competitive Pay

In start-up situations, a founder often begins by attracting others who share his/her passion.  The question of market pay comparability doesn’t come up. The hiring decision is made around the person and what he/she can bring to the equation. The conversation may start with, “What would it take to get you to come join me in this adventure?” Consideration may be given to what the person was earning in their present position, but an estimate of the contribution that the person will make drives the decision.

During the formative years, this “pay-the-person” approach works well. In time, though, as the company grows and more specialized and diverse skills are required, new employees are less likely to driven by the owner’s passion and more committed by their own career ambitions. We will see wide differences in pay for positions that have comparable impact. Employees begin to see that some people are paid more because they’ve been there longer rather than market worth or contribution.

At Disney, in the early 40’s, Walt was rudely awakened to this transition when his company was unionized. One of the major complaints was inequitable treatment among employees’ pay and benefits. He was driven by his passion and belief in his employees’ loyalty and was blind to their frustrations and perception of inequity.

Internal Equity

Every job in a company has value and contributes to company results. But that value is not equal from job to job. Some jobs have greater impact than others. Without some rational process for establishing internal equity between jobs, distortion occurs. Some individuals may be over paid largely because they have been with the company a long time. They received regular increases that elevated their pay above market. Others may be underpaid as a result of being hired at below market rates because of personal circumstances or inexperience, and have stayed at a modest level in spite of career growth and increased job responsibility. They are tempted to quit and be rehired in order to receive what they’re worth in the market. By developing processes for determining the relative worth of jobs the company is evolving from a “pay-the-person” compensation philosophy to a “pay-the-job” model.

Administrative Practices

As an organization grows, it needs some rules to guide decision making. With growth, it becomes impractical for the founder to make every decision about employee pay. Trusted managers, with guidelines, can make day-to-day decisions that are consistent and fair across the entire organization. In addition to providing guidelines, salary administration policies reflect the culture that the founder wishes to incorporate into the fabric of the organization.

With regard to pay, organizations often wish to adopt a “pay-for-performance” culture. In truth, most reward systems are a combination of “pay-the-person," “pay-the-job," and “pay-for-performance." Most pay systems have salary ranges, which are job-based, that allow for pay differences within the range parameters to recognize personal attributes, and performance.

At Disney, Walt recognized that he needed systems to help him reach his dreams. He reached out to his brother, Roy Disney, to help him provide structure and management skills. While their relationship was not always harmonious, it was very effective in growing a premier company.

When is it time to implement a system?

There are a few signals that announce it’s time to implement or fine tune your reward system:
  • When you see a wide difference in base pay rates, more than 40%, for people performing the same or very similar jobs.
  • When, because of pay, you find it difficult to attract the talent that you need to reach your objectives.
  • When you have to pay new employees more than their manager or supervisor, or peers having comparable experience, to attract them to the company.
  • When you are tempted to rehiring former employees at salaries substantially higher than their pay when they left.
  • When you have employees that are being paid 20% or more above market rates largely because of their length of service.
There is nothing in the labor laws that says a company has to have a salary administration system. There are laws, though, that address minimum wage, overtime rules, and disparate treatment of protected employees. The truth is, if you had a sound compensation administration system, you would be proactively addressing these concerns, plus you would be aligning your reward system with your culture and operational priorities.  So, if you’re experiencing any of the symptoms mentioned, don’t wait.

Joel Myers is a career Human Resources professional, with over 40 years in the field including 26 years in consulting. The Centre Group helps clients achieve success by “Leveraging the Human Spirit” within their organizations.

Posted: 10/14/2015 7:30:00 AM | with 0 comments
Filed under: Centre, Compensation, Group, Human, Joel, Myers, Pay, Resources, System, The

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