Is your compensation system working? Are you sure?
  • leadership
  • Blog post

Is your compensation system working? Are you sure?

Ask most HR people, “Is your compensation system working?” and they’ll say that’s a tough question to answer.

After all, reliable evidence of comp plan effectiveness is hard to come by. That’s according to Jeff Pfeffer and Bob Sutton, two Stanford professors and authors of “Hard Facts, Dangerous Half- Truths & Total Nonsense: Profiting from Evidence-Based Management.”

Without hard data, senior executives are often left relying on untested assumptions, preconceived notions and experience-based biases about what works or what “must” or “should” work.

Possible consequences
These notions sometimes make a lot of sense, but often amount to “half truths” that can leave execs scratching their heads wondering why a comp plan isn’t getting the results they want.

Among the possible consequences:

  • Turnover. Star performers leave, but mediocre performers stick around.
  • People do the minimum. The next generation of potential stars get discouraged and “retire in place.”
  • Unexpected side effects. People’s efforts don’t seem aligned with company goals.

So what are these half-truths and assumptions? Pfeffer and Sutton identify five:

1. People are motivated by money
To a degree, employees are (especially lack of money). But different people are motivated by different things. Some are driven by opportunities to achieve tough goals, innovate and build a business.

Others are motivated by teamwork and their friendships with co-workers. And still others just want to collect a paycheck and get home to their families.

Key: Identify an employee’s biggest motivation. If it’s money, then you know how to motivate the person.

But what if comp is second or third and what they really live for is individual attention from an experienced mentor? In that case, give them that (if possible) and make sure the comp plan doesn’t demotivate them. (That is, companies can and have overplayed the non-monetary compensation card.)

2. Individual performance can be reliably and accurately measured
Sometimes, yes, you can measure individual performance. But it’s usually not easy. Some issues: Do individual performance reviews include subjective judgments? Supervisors may use differing scales for things such as “cooperativeness” and “attitude.” Or if you decide to get completely scientific in your measurements, then what about human “intangibles” necessary for success?

Key: When you’re reading performance reviews to determine raises, recognize the difference between reliable measurements and subjective (thus less reliable) ones. Make sure that those measurements also accurately reflect what’s necessary for job success.

3. Performance is a solo activity
Managers no doubt want individuals to take responsibility for their success or failure.

At the same time, people may be dependent on others for success – the information people give them (including the ability of people to articulate problems to them), the industry, the larger economy, corporate priorities and organization competence, and just plain dumb luck.

Key: Make sure your comp system doesn’t “pretend” people are completely independent of outside issues.

4. ‘What worked in my last company will work here’
Could be. But given the difficulties mentioned in the previous half-truths, how likely is a new comp system based on a different company likely to work?

Is the industry the same? How much time has passed? Is the market different? Is there real evidence that previous comp system delivered the results cited, or were there other factors involved?

Key: Before revamping a comp system, conduct a small test. That may give you valuable feedback and allow you to adjust the system to reduce unwanted side effects.

5. Consultants can figure it out for us
Some consultants deliver. But Pfeffer and Sutton cite an example that should send a chill down the spine of most HR pros: A senior HR consultant admitted that his company pushes pay-for-performance plans, even though the programs almost always fail.

Why do consultants do this? Because they get paid for advice (and sometimes to implement the plan), but not actual business results. And even worse: When the plan doesn’t work, the consulting firm gets more fees by trying to fix it.

A final note: Whatever system you use, it won’t work without managing people’s expectations. Based on regular supervisory feedback, workers should know “about” how much of a raise to expect come raise time.

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