More about compensation

[The inquiry that follows is edited down from a longer version. I hope I’ve left its points intact. – Bob]

Dear Bob …

I’ve been enjoying your columns on compensation (“Poor Joe” and “Comp logic,” Keep the Joint Running, 10/22/2007 and 10/29/2007). I think your “4 variable” plan is great (I’m trying to find a way to clandestinely leave it somewhere my boss can’t miss it). They’ve really got me thinking…

As you might gather from the Boss comment, my personal experience has been that most organizations rely primarily (if not exclusively) on the first two factors (Base and Promotion) when dealing with the majority of their non-executive employees.

As you said in the second column, the benefits of creating and retaining satisfied and productive long-term employees are tough to quantify. Wage and bonus costs are not. In most cases the $20,000 bonus will be seen as twenty grand that didn’t get put on the bottom line this year, not as $5000 saved over the next decade.

Despite how earnestly we declare that “were all in this together,” the interests of the employee and the interests of the employer really are always divergent when it comes to compensation.

As an employee, no matter how much I love my job and think I’m being treated fairly, I’m still going to have a strong financial incentive to maximize my compensation (for reasons that usually don’t have anything to do with the interests of my employer).

Likewise, as an employer, no matter how pleased I am with the value a particular employee provides me, I’m still going to have a strong financial incentive to minimize that employee’s compensation.

Now we reach the sticky part…

If managers are doing any sort of decent job, employees will be productive in their current positions, and there won’t be a lot of empty holes in “higher tiers” desperately waiting to be filled via promotion.

While this may seem ideal from an organizational standpoint, it’s a scenario pretty much designed for hard feelings when it comes to compensation and retention. Since the Org Chart always narrows on the way up, the legitimate number of “next tier” slots will always be MUCH smaller than the number of well-qualified employees from the “lower tier” (this is especially true in smaller shops where there are less slots to begin with, and the folks currently filling them tend to hang around much longer).

This means something has to give – either employees lose their motivation and become complacent, the company starts awarding phony promotions just to placate their ambitious employees who have nowhere to go, or their best employees leave for opportunities elsewhere.

Do you see any way out of all this?

– Gone comp’ing

Dear Gone …

Here are a few thoughts on some of your key points:

• Are the interests of the employee and employer truly divergent? Of course they are. Replace “employee” with “contractor” and the point is clear: Two self-interested parties have to arrive at an implied contract that results in the exchange of money for services. That isn’t a problem. It’s in the nature of a system built on balancing supply, demand and price.

• I don’t think I’ve ever said the benefits associated with retaining good employees are hard to quantify. I’ve read several studies that quantify the cost of replacing experienced ones. The typical finding is that it costs roughly one year’s salary.

• Careers getting stuck when retention is good: Quite correct, which is why the best companies (as I define “best”) redefine “career.” If you consider a career to be a series of assignments and experiences that broaden and deepen your abilities, preparing you for a wider and more responsible variety of roles you can play, then retention creates no barriers to careers.

Keep in mind that well-run companies generally grow, and growth creates more room for the best employees to take on additional responsibility. What’s tough is re-setting everyone’s expectations so that career growth doesn’t translate to ladder-like elevation in the hierarchy. It’s tough enough among the employees who want their careers to progress. It’s even tougher among the managers and executives who are prone to think their titles and proximity to the CEO make them special.

– Bob

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