Questionable Logic Taints Compensation Literature

Like any other field of study, the conclusions drawn by authors suggesting courses of action to be taken by their readers require that the underlying facts and logic be sound.  It is clear from reading a number of recent articles that the authors either do not completely grasp underlying compensation theory, or that they have chosen to ignore it in an effort to either gain publicity or convince potential clients that their services are “the best.”

I read an article recently in a highly read professional journal that is representative of much recent compensation “thought.”  While there was much to question and critique, two points stand out as major errors — one relates to the reason why certain approaches are taken, and the other to a fundamental logic flaw. Continue reading

EEOC Rules “Sexual Orientation” Within Definition of “Sex” for Purpose of Civil Rights Act of 1964

The Compensation Times

In a decision issued July 16, 2015, the United States Equal Employment Opportunity Commission (EEOC) ruled that claims of lesbian, gay and bisexual individuals may be brought to the EEOC under the provisions of Title VII of the Civil Rights Act of 1964, which prohibits employers from relying upon sex based considerations or taking gender into account when making employment decisions. While the decision came in the context of a Federal government employee complaint, the Commission notes that the language applicable to the private sector is essentially the same, suggesting it would apply the same logic.  The 3-2 decision, in apparent conflict with the rulings of many of the Federal Circuit Courts of Appeals, does not purport to create a separate class of individuals to be protected, but instead concludes that:

[S]exual orientation is inherently a “sex-based consideration,” and an allegation of discrimination based on sexual orientation is necessarily an allegation…

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Instead of Googling “How To Attract Millennials,” Why Don’t You Just Ask Us?

The Compensation Times

I was born in 1991. I had my first cell phone in middle school, my first email address when I was probably 10. And yes, I was given the much derided participation trophies and ribbons. But which generation was giving out those trophies exactly? We can put the inter-generational hostility aside. I’m not here to force you to learn internet slang and I expect you’re not going to force me to watch Cheers. You want to attract young professional Millennials, and we want jobs to pay off our student loans. We have a shared interest here.

As it turns out, it’s very easy to find Millennial talent. We comprise over a third of the global workforce and that percentage is only going up. There are a lot of us out there. We’re all hungry for work. The real surprise is how easy it can be to retain Millennial talent…

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Context for the “CEO Pay Ratio” in Manufacturing

For more than 20 years, Merces has studied the compensation of executives and staff in Michigan manufacturing. While the media, politicians and various interest groups try to take small samples of data on the far end of the spectrum, and imply that entire industries follow unpopular paths, we are more concerned with what happens in the “real world,” and what we’ve found is that it doesn’t seem that CEOs and owners are necessarily that evil after all.

One of the silliest statistics that pundits obsess over is the “CEO Pay Ratio” — the percentage by which the pay of the Chief Executive Officer exceeds that of the average employee of the company (others use the lowest paid employee). It’s silly primarily because so much of that statistic is a function of the size and organization style of the company rather than the actual amount of compensation.  A big organization requires more levels of management, hence there will be more “increments,” each of which will increase the ratio.  A “flat” organization will have fewer “increments” than a more hierarchical structure.  It’s just math, and there’s nothing “moral” or “immoral” about it. Continue reading

Tools Don’t Substitute for a Compensation Program

Not too long ago I had the opportunity to spend several days with a client working through a job evaluation exercise. What makes this client somewhat unique is that the CEO has a human resources background, which certainly makes explaining compensation principles a lot easier.  What struck me, however, was that this CEO, despite a strong background in compensation, had never been exposed to job evaluation — an essential component not only of a “best practice” compensation program, but of any compensation program that is actually going to work.  If a top-notch HR executive hadn’t heard about this, what in the world is going on everywhere else? 

The truth is — the compensation profession has lost its focus on theory and method, and has fallen in love with tools. That’s a problem, because the vast majority of companies don’t have internal compensation professionals, and many HR folks are at the mercy of the vendors trying to get them to buy things to make their lives easier. Don’t write a job description, use “DescriptionsRUs” to create one for you.  Don’t bother finding out what your people do, or what you need them to do — this cool piece of cut and paste software will let you create something hopelessly meaningless, but probably ADA-compliant.   You don’t need a salary structure, get “SurveySolvesAll” which will pinpoint to within four decimal points the appropriate pay for an individual by just typing in a zip code and a generic job title.  A few months ago I was invited to a seminar called “why your HR spreadsheets stink” which implied that using a spreadsheet was a horrible waste of time when a nice piece of I’m sure very expensive and quite generic software was available. The worst offense? A bulletin from World at Work announcing that most employers use market pricing as their method of job evaluation.  Why the worst?  Well, look it up, folks, market pricing is by definition excluded from the concept of job evaluation, which is a method for ascertaining the internal value of a job. Continue reading

Why the General Increase Needs to Go Away….

About half of the participants in the 2014 Merces/MMA Compensation in Michigan Manufacturing Compensation Survey reported that they use “general increases,” that is, they provide the same pay increase (usually as a percent) to all their employees.  Frequently done in response to changes in the cost of living, or simply because it is felt that they are “fair,” general increases are an easy way to administer pay, but far from effective.

The problems with the general increase approach are numerous:

  • A general increase program locks employees into the position they were in, relative to other employees, regardless of their performance or abilities.
  • General increases result in unnecessary turnover by failing to keep up with an employees’ value, thus providing other employers with the opportunity to use the company as a training ground.
  • Over the long term, pay will be “compressed,” with lower level jobs paid above market, and higher level jobs below market.  In either event, scarce resources are poorly allocated.

To illustrate part of the problem, consider the graph below, that illustrates the value, or “price tag” of a skill set, compared to the pay of an employee in a company using a general increase system.

Continue reading

Compensation 101 – The Essentials

Certainly there are differences of opinion among human resources professionals about what is “essential” in a pay program, and certainly trends come and go, but common sense and decades of experience and observation will lead most practitioners (well, those without a lot of money invested in an alternative product they are trying to sell you)  to conclude that there are three components that are essential to an effective compensation management system:

  • an internal equity, or “job evaluation” process
  • a tie to the market through the use of competitive data
  • pay for individuals tied to the performance of their job duties

It is fair to also address up front some of the misunderstandings and misconceptions related to pay:

  • Using surveys only tackles part of the issue.  Market data does no good for jobs that don’t appear in surveys, or for jobs that are different than the surveys.  Market data is only as good as the people who conduct and complete the surveys, and frankly, a lot of it has little to no actual value.  Many of the survey products on the market today that are touted as end-all solutions aren’t surveys at all, but computer models of what pay “should” be.
  • Giving “across-the-board” increases (e.g., everyone gets 3%) is a bad idea, and it isn’t fair.  Even if it was fair that everyone get the same increase, it presupposes that everyone was paid the right way before the increase. These types of increases lock employees into the position that they were hired, does not reflect the reality of the labor market and do not fairly reward performance.
  • Step increases, and seniority-based pay programs, are fundamentally unfair.  First, they don’t reflect reality — people do not grow at the same rate, and some never grow. Second, seniority doesn’t guarantee higher levels of performance, it only gives you more time to show how you perform.  While there are aspects of seniority that provide value to employers, they pale compared to actual observed performance on the job. What these types of programs actually do is to make pay management easier — not better.
  • An organization should never have to pay more to a new employee than a good performer who is already in the organization — this isn’t “just something that is always going to happen” — its a prime characteristic of poorly managed pay.
  • The right way to deal with a job with two different sets of responsibilities is NOT to average the market rates for the two different jobs.  Here’s a hard fact about how the labor market works; you have to pay for a skill set 365 days a year, even if you only use it 10 days a year.
  • Adjusting pay to reflect the “cost of living” is both costly and ineffective.  While it may seem “fair,” since the beginning of recorded statistics, the cost of labor has always lagged the cost of living.  Why?  It’s very simple — organizations just can’t raise prices every time the BLS puts out its monthly guesstimate of the cost of new housing and appliances.
  • Managing pay the right way is not complicated or expensive, and neither is managing performance.  It just requires actual management.

It should come as little surprise that many if not most pay programs fall victim to one or more of the characteristics listed above.  If those are misconceptions, that what is the optimal solution, and why? Continue reading