EMH Insights

The Dark Art of Compensation

One of the biggest challenges facing employers is balancing the constraint of limited resources with the necessity of fair compensation for employees.  Equally as important is communicating this information in a way that is transparent, yet doesn’t cause anyone’s feelings to get hurt.  Add to that the sensitivity caused by evidence that women and minorities are routinely paid less than other employees and a subsequent fear among employers of legal action and your compensation challenges continue to escalate.  On the other hand, a recent Harvard Business Review article highlighted that “open and honest discussion around pay was found to be more important than typical measures of employee engagement, such as career advancement opportunities, employer appreciation and future enthusiasm for the company,” according to a recent study by PayScale.  Pay is not just a quantitative metric, it is “an emotional measure reflecting how valued an employee feels by the their employer.”  Employees want to understand the firm’s resources, priorities, and objectives and understanding the pay structure is an important way to communicate this information to employees at all levels of the organization.  This is hard to do if your organization does not have a clearly defined compensation system with clear processes.  Additionally, employee incentives should be aligned with company goals so that the work they do moves the organization toward its long term objectives.  Because of the complexities of compensation and its high importance to employee satisfaction and performance, a number of clients have recently approached us about how to master this dark art.

The foundation of your organization’s compensation structure is your organizational structure, job descriptions, and base pay structure.  Transparent, logical compensation that is aligned with employee responsibilities is an important part of starting a healthy employee-employer relationship.  The foundation of base pay should be determined based on a clearly defined set of responsibilities, the employee’s relevant experience and education, and the constraints of the organization.  Building out an organizational chart with clear differentiation between different roles and a set of accurate job descriptions helps employees understand what they should be doing on a day-to-day basis and also how their pay links to these recurring activities.  Additionally, employees will be able to see where they fit in the structure of the organization and why their pay might be different from someone with similar work experience in a role with different responsibilities, for instance.  Getting your structure and job descriptions right can be a challenge, especially because organizations are constantly evolving.  The organizational structure and job descriptions need to be revisited annually to ensure that they are still accurate as your organization changes.  To facilitate this, an open dialogue needs to be fostered so that employees are aware of why they are paid what they are paid, even as their responsibilities and the situation of the firm changes.

The next piece of compensation that needs to be mastered is the art of performance management.  The big question is whether employee’s incentives are aligned with the strategic goals and vision of the organization.  To structure such metrics, the key strategic goals of the organization must be clearly outlined so that the individual goals of an employee can be structured to further them. These overarching goals may be internal, such as process efficiency or communication strategy, or external, such as clients acquired, markets entered, or revenues gained.  In a sales role, for instance, are employees being incentivized to hit targeted numbers that are aligned with the organization’s overall goals, and is the work that employees are doing that directly feeds into the firm’s growth being rewarded?  In a development role, are employees being compensated based on meeting deadlines or building new software modules?  In cross-functional initiatives, are teams communicating effectively and working in a fashion that is sufficiently collaborative to meet key milestones and benchmarks?  Depending on the type of work your company does and how your organization is structured, performance management and employee incentives can be a powerful tool for organizational progress.  We recently worked with a client whose company had grown considerably in recent years.  As a consequence of this success, the company has been able to enjoy a more robust salesforce and considerably higher revenues.  Further, the company’s sales team has been achieving more sales per employee than ever before, and they have continually exceeded their revenue targets over the past two years.  Despite all of this, however, our client’s projects continued to be executed with a decreasing level of efficiency and the company’s profitability was not increasing at the same rate as its revenues.  After working together for some time, we were able to re-define our client’s compensation structure in a fashion that emphasizes resource allocation, a collaborative (as opposed to “hunter-gatherer”) dynamic, and a focus on the bottom line.

Compensation challenges manifest themselves across all sectors.  In summer 2014, the City of New Orleans passed a progressive new initiative called the Great Place to Work.  These changes to the Rules of the Civil Service Commission address key compensation issues such as paying above the minimum when there are recruitment and retention difficulties, fairly compensating people with extraordinary qualifications, and providing temporary pay for employees on special assignments.  With the rule changes, the City of New Orleans is also building out new systems and processes to help employees and HR managers navigate the complexities of compensation.  EMH worked alongside Civil Service and other departments of the city to ensure that the processes were transparent, user-friendly, and fostered accountability among all parties.  As these new processes roll out, employees will be more aware of how their compensation is determined and HR managers and appointing authorities in various departments should be able to compensate their employees in way that they consider to be fair, yet cost-effective.  The new processes should also lessen the workload within the Civil Service department since HR managers will more autonomous and accountable, giving them more time to focus on other pressing issues such as job and compensation studies.  Building out clear, transparent rules and processes can help prevent complaints from employees, whether you are in the public, private, or non-profit sector.

In order to master the dark art of compensation for your organization, a few key components are necessary.  First, a clear and transparent system for compensation and performance management which links compensation to job descriptions, qualifications, and metrics can help employees feel valued and aware of how their compensation works.  Second, clear systems and processes that allow HR managers and employees to ask questions, request more information, or challenge the current status quo are needed. Additionally, this type of structure helps employees feel empowered to ask about their compensation if they are uncomfortable with it.  Once you have a strong, organized, transparent system of compensation in place, with appropriately aligned incentives, your employees will be more engaged with the work they are doing and accountable for the organization’s long term goals.  Despite the seemingly mysterious and challenging nature of pay, mastering the dark art of compensation can help you to move your organization forward in a powerful way.  EMH has worked with the public, private, and non-profit sectors to navigate some of the challenges of compensation and organizational planning.  As you look to optimize your compensation and performance management systems and processes, reach out to EMH as an objective third party who can address the difficulties you are facing as your strategic adviser.

-Katherine Robinson, EMH Consultant