The Salary Sage

Are the Best Leaders Getting the Best Results?

In a past entry, I elaborated on the concept of “double-dipping.” That is when a person is paid twice for the same performance. This occurs often in pay programs that fail to adequately distinguish between what performance warrants a base salary increase and what performance justifies an incentive payout. In many companies, excellent performance results in both.

Instead, I strongly advocate that pay programs clearly distinguish between these two types of performance. But simply distinguishing is not enough. They need to be divided in a specific manner. That is, base salary increases for managers should be predicated exclusively on leadership effectiveness. Incentive payouts should be predicated exclusively on outcomes or results.

Approaching pay this way enables businesses to do something very important – that is, answer the question “Are my best leaders getting the best results?” The reason this is so important is that it is often not the case. It is surprising how frequently we find that weak leaders are generating excellent results, and strong leaders are generating poor results. This can occur because weak leaders may bully their employees to get results, and strong leaders may be too soft on employees and don’t hold them accountable.

If the pay program can tell us who are our best leaders, and who is getting the best results, then we can begin to focus training and development efforts to improve their specific weaknesses with the goal being to have the best leaders producing the best results. In addition, we can begin to weed out cases where poor managers are getting weak results. Conversely, we can avoid accidentally losing the leaders who are getting excellent results simply because they are weak managers.

In a properly designed pay program, it is possible to rank managers from highest to lowest on BOTH leadership effectiveness AND results. The exhibit below is an actual such ranking from one of my clients (the names of the managers have been suppressed).


The left hand column ranks the managers from the best (1) to worst (38). Adjacent to each one is the associated ranking of their results. For example, the best leader (1) produced results which ranked 25th out of 38 (not very good). The 5th best leader, on the other hand, produced the best (1) results.

Looking at the other end of the spectrum, the worst leader (38) also produced the worst results (38). When viewed in this manner, it becomes easy to see which managers are “keepers” and which should be considered for replacement. In the exhibit, the managers highlighted in green are the best, the ones in red are candidates for replacement, and the ones in yellow are at risk. The others are what you might call “typical.”

This demonstrates the power of a well conceived pay program. And it all stems from a basic separation between the factors that drive base salary increases and incentive payouts.

Developing a Consistent Approach to Salary Administration

Since the HR function serves many independent departments, and sometimes even distinct offices or  subsidiaries in disparate locations, it’s critical to standardize systems and processes. This is the only   way to ensure a consistent approach to administering base salary for all employees. The best place to  start this process is by posing key questions that will help bring appropriate issues front and center for your consideration. In this blog entry, you’ll find high-level questions to ask relating to:

• Market considerations
• Salary range structure
• On-going administration
• Cost implications

Market Considerations

• How will we define our competition in the various markets in which we operate?
• How will we reflect pay differences for the geographic markets in which we operate?
• How will we reflect pay differences based on size and complexity of our locations?
• What is our desired competitive position relative to the markets we compete in?

Salary Range Structure

• Will jobs be grouped into salary grades or will each job have its own unique range?
• If we use salary grades, will different offices have the same grade structures?
• How wide will the ranges be (from minimum to maximum)?
• Will all ranges have the same width or will they vary by job size or other factors?
• If we have salary grades, how will we assign jobs to grades?
• If we have unique ranges for each position, who will be involved in creating and approving those ranges?

Salary Administration

• What factors will drive salary range adjustments?
• How often will ranges increase?
• What factors will determine salary increases? (i.e., competencies, experience, tenure, licensure, accreditation, etc.)
• What factors will determine where employees fall in their range? (i.e., knowledge, skills, abilities, performance, tenure, qualifications, etc.)
• How will we ensure employees are moving to the appropriate location in the range?
• How long should it take employees to move locations in the range?
• How will we handle employees who are paid over the range maximum? (i.e., freeze pay, lump sum increases, other?)
• How will we handle employees whose pay is in the range but higher than it should be based on their performance or other pertinent factors?
• Are we willing to give zero increases? Under what circumstances?
• What differentials (i.e., overtime, call-in, on-call, etc.) will we offer? who will be eligible to receive these differentials? How much is each one worth?
• Where should new hires come into the range?
• What is considered a promotion and how much additional is a promotion worth?
• Should we reserve a minimal amount of “headroom” between managers and their highest paid subordinates?

Cost Implications

• Will salary ranges increase every year?
• Will each location receive the same or different salary increase budgets? If different, based on what factors?
• What level of assurances will we give employees with regard to future increases?
• Will managers have discretion when it comes to determining an employee’s salary increase or will the increase be determined automatically based on predefined factors (i.e., performance versus position in range)?
• What happens if one or more locations runs into financial difficulties? Can that location  suspend salary increases while the others continue to grant increases?

Creating a consistent compensation philosophy that addresses issues will promote effective compensation practices. Stay tuned for future blog entries where these questions are answered.

MEASURE OF THE MONTH – Process Improvement

This month, we are featuring Process Improvement. As you prepare for a new year, an important measure of success can be making sure your internal processes are running efficiently. Here are some guidelines on how to make Process Improvement a successful incentive plan measure.

 

DEFINITION

Ensure current processes are efficient and well documented and that managers understand these processes and can use them effectively.

 

WHEN TO USE THIS MEASURE

Use this measure when you want to encourage employees and managers to focus on improving the overall efficiency and effectiveness of departmental systems and processes. This measure is often considered a precursor to a full-fledged service measure as it is necessary to ensure the department is functioning efficiently before it can provide excellent service to customers or other departments.

CALCULATION

Performance on this measure can be quantitative or subjective depending on the nature of the process. If the process involves manufacturing, then the obvious factors of volume, quality and timeliness apply. If the process involves service, then it is likely that success will be more subjective. When measuring service-oriented processes, volume, quality and timelines remain relevant, but instead of being determined empirically, results will depend on input from those using and benefitting from the process (i.e., customers, users, managers, peers, colleagues, and subordinates.)

HOW TO USE THIS MEASURE

When Process Improvement involves subjective elements, it is useful to think of it as a six-part process:

Part 1 -- Determine the necessary/desired improvements.

Part 2 -- Develop a detailed plan for implementing the desired/necessary improvements.

Part 3 -- Get the plan approved by whomever will be judging its ultimate success.

Part 4 -- Implement the plan.

Part 5 -- Communicate improvements to users in writing and/or face-to face training as appropriate.

Part 6 –- Determine if desired improvements have actually occurred.

Each of these six parts should be included in a well-designed incentive plan measure and associated goals. For example, Threshold could be achieving Parts 1 & 2, Target could be achieving Parts 3 & 4, and Outstanding could be achieving Parts 5 & 6.

WHO IS THIS MEASURE BEST FOR?

This measure can be used virtually anywhere since every department, regardless of its purpose and size, has processes that can always be optimized.

CAN THIS MEASURE BE GAMED?

If you follow the recommendations above, there is little concern that this measure might be gamed or abused in some manner.