To the victor go the spoils?
This week we’ll be looking at a TED talk where author, Al Gore speechwriter, and business guru Dan Pink rolls out an opposing viewpoint to the traditional method of incentivizing modern employees with monetary benefits. But first let’s take a look at some of the current strategies in place to build a compensation and reward structure within an organization.
Weighing internal equity vs. external equity
When deciding on the pay scale of an individual position, an organization must decide how much weight should be given to the needs for the position within the company compared to their core activities versus what the market rate for the job presently is. When researching the market for an appropriate pay scale, one can find a huge range being offered to a given position—largely due to the aforementioned “internal equity” determined by various companies in the market.
Fixed vs. variable pay
Means what it says on the tin. Deciding on whether or not an employee should be paid a fixed, expected salary or if the salary should fluctuate depending on the employee’s or the overall business’s performance.
Performance or membership
Similar to the fixed versus variable debate, but tying compensation to an individual’s performance, the team’s, or the organization’s overall performance.
Job vs. Individual
Will an organization pay a different rate for a superstar employee compared to a mediocre performer in the same position or decide to pay all employees within the same pay scale for the position?
Below-market vs. above-market
This one is also pretty self explanatory. This decision revolves around the question of value of the position within the company. The decision to pay below-market rate may not only come from lack of value placed in a particular position but could also stem from a sense of prestige or positive resumé fodder for young promising talent. This may come at the cost of them “graduating” from the position to seek greener, more lucrative pastures.
Monetary vs non-monetary rewards
This will be the crux of the case we will be discussing shortly. Monetary rewards are exactly what they sound like, but may not be the best motivator. Non-monetary rewards can be paid time off, in-house child care, employee recognition awards, free lunches, free time to develop passion projects (like Google’s since abandoned "20% Time") or a endless number of other benefits.
Open vs. secret pay
Some organizations will dissuade employees from divulging their salaries to other workers to avoid conflict. While on the other side of the spectrum, some organizations publish their payroll within the company or even to the general public .
Centralization vs. decentralization
The question of whether or not to have all salary decisions made from a centralized segment of the organization or made individually by managers and departments.
Like all things in business, there is no silver bullet solution. Most of the above mentioned compensation methods exist as a spectrum rather than in a binary state. The best fit for an individual organization depends on the goals and culture of the business and its industry.
Compensation tools
Job based compensation plans
This is the predominant method of compensating workers in the United States. Striving to create a balance between internal, external, and individual equity. This method creates a hierarchical structure of jobs within in the organization, compares them with their market value, and assesses the individual based on experience, seniority or performance. This method has it’s drawbacks as it forces an organization to strictly and subjectively categorize its different positions and doesn’t always take into account the difficulty of the tasks required and the rapid changes that may be taking place within the positions. This method may also plays directly against organizational efforts to avoid disenfranchising women and minorities and may institutionalize wage gaps.
Skill based compensation plans
This method starts all employees at a similar rate and rewards its employees based on development and/or performance. This method can bolster cross training initiatives and can give you a more manageable, well rounded staff. This method may come with a high price tag. If employees take advantage of all the training and development programs available, payroll costs can increase without the needed increases in revenue to support it. Thus, this method requires thoughtful implementation and careful oversight.
Paying for performance
When incentivizing employees most organizations directly link performance with pay increases; this ideology, when viewed too myopically, may have some significant disadvantages.
Author Dan Pink, believes that just strictly offering a monetary reward for performance may actually stifle creativity and lateral thinking in modern day workers. His claims—backed by a study (which has its detractors) from the London School of Economics—state that when offered a large incentive to solve a problem, all but the most mechanical parts of our brain effectively stop functioning. His theory posits that what really drives critical thinking and creativity is a three pronged approach consisting of: autonomy, mastery, and purpose. Rather than holding a sword of Damocles over an employee’s head or offering a payout large enough to cloud judgment, one should be challenged to master a skill that they deem important, to work toward something greater than themselves, and to have enough autonomy to create and work without inhibiting factors.
This philosophy is not inherently anti collaborative. Nor is it in opposition to common goals between employer and employee. While basing incentives on pure performance may work in very specific fields or business models, they can be disastrous in others. This focus on performance may lead team members to hold back valuable information from one another or attempt to sabotage each other to achieve greater personal success. It can also present opportunities for reckless and dangerous behavior, as seen in Lehman Brothers executives making incredibly risky financial bets in the name of personal bonuses, thus leading to the tanking of the US housing market and the global financial crisis of 2008.
Performance based incentives may not be based on an individual's performance alone. Although performance and skills should be taken into account to avoid disenfranchisement, employees can be incentivized on a macro scale as well. Other approaches can include equally distributed profit sharing programs, team/organization-wide bonuses, or any other large scale incentives.
Balancing rewards it a challenging for any organization, regardless of size or practice. When building an appropriate compensation system one must carefully weigh the company’s needs and goals against those of their employees and strive to create value for all involved. There are no easy solutions.
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