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Put a compensation policy in place to avoid headaches

August 29, 2014
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When we do compensation consulting, we usually start with asking about the organization’s compensation philosophy.

In a surprising number of instances, there is no real thought about what this means, let alone a formal statement. It just sort of happens, or it is a result of doing what has to be done and on a case-by-case basis.

The end result is frequently a mish-mash of rates and no organized approach. When you have just a few people, it tends to be less of a problem, until one of your key people takes another job or says they will because they are underpaid. This reactive approach can cause resentment even in a small organization. In a larger organization, you can have all sorts of problems from discrimination matters to excessive turnover, and quite frequently a union coming in to help bring order and reliability to the situation. 

All of these issues cost you money and time that could be spent in better ways.

It really isn’t so difficult to put a compensation policy in place, and it gives you a good umbrella under which to operate. It starts with a simple idea: How do you want to pay your employees — just enough to get by, minimum wage, at market, above market? You may even extend it to include benefits and think in terms of total compensation. We had a client that, because of its industry, expressed it in terms of working conditions, as well. This included operating environment and stability of employment.

Another consideration may involve deciding whether internal equity or external equity is more important, or perhaps what type of balance is required. I tend to favor making sure people inside the organization are lined up properly based on responsibility and skills, since employees easily make judgments about this situation and may have less understanding of what the market looks like. However, in some industries it is very important to be in tune with the market.

Once you start to consider these factors, you may get to a simple statement that expresses your strategy, such as: “We want to pay our employees at 10 percent above market with competitive benefits.” The next step is to make the comparison on a regular basis — usually annually — and then take steps to bring the pay plan in line with your philosophy. Keep in mind that wage surveys are not absolute and may depend on this year’s participants. Moving in the right direction over a couple of years is a good approach, rather than trying to do the full strategy in one year even if you can afford it.

What is the right strategy for setting your compensation philosophy? It depends on a variety of factors, such as the availability of the proper workforce, level of skills required, what you can afford to pay, what your competitors pay, how much turnover can you afford, etc. In my view, this last factor may be the most important.

The cost of turnover is a hidden expense in many respects and can easily be overlooked. It is also hard to put a dollar figure on things like lost customer knowledge, training investment time and expense, management time to assure new employees do what is expected, and unengaged employees. All these things lead to low productivity. This is probably the key element. I say this because the cost of a little higher wage or salary can easily be covered by a highly productive worker.

I’ve written about the difference engaged employees make, compared to those who just show up. In a recent article about Costco, executives talked about the high wages they paid and the low turnover in a business with very small margins. They are making a ton of money and are happy with the compensation strategy and happy employees, while their low-paying competition continues to make news about employee relations matters and end up spending big bucks to shape their image for their customers.

This brings us to the discussion about how minimum wage increases are going to break the bank and how thousands of jobs will be lost. Economists may be able to look at the statistics and draw such conclusions. Unfortunately, they are rarely looking at a dynamic business environment because it is difficult to analyze data when there are multiple moving elements that all have impact. However as a business person, you can make decisions on a data basis as well as on an intuitive basis, and most business people rarely have all the facts. So you have to give it your best shot and make adjustments along the way.

Instead of resisting every time the issue of higher wages is raised, maybe a better approach is to think, “How can I increase output and productivity to cover the costs?” Ask those who are going to gain the benefit of higher wages to help. Then it isn’t a “giveaway.” When this new mentality gets ingrained, the increased productivity will likely far outstrip the pay increase.

Perhaps we also need to get the economists to think about a new concept called “a trickle-up economy” where the folks at the bottom of the pyramid become most stable in their efforts and allow those at the top — the 1 percent — to get more due to the new foundation and the value it produces. If we supported this concept of adding value at the bottom, the resulting payback would make life better for everyone. It might bring some reasonableness to the obscene difference between the top paid part of society and the foundation of society.

People who know astronomy have heard of the Big Bang Theory, which explains how the universe started from a single explosion and set things in motion. Scientists now supplement that theory with the generally accepted thought that the universe is expanding at an ever more rapid pace. These scientific premises are similar to the economics of the U.S. business environment. Those few at the top are racing away from the mass at the bottom, and unless we do something about it, we will have a new big bang, and we aren’t going to like it. The solution is actually rather simple: Invest in the people and we all move forward. You really do get what you pay for.

Ardon L. Schambers is principal and president of P3HR Consulting & Services in Grand Rapids.

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