Recently, I have given several presentations on the topic of how compensation should be aligned with the mission of an organization. Although I have been discussing the relationship between pay and company objectives for many years, recent media attention has brought substantial focus on this topic. To provide a perspective on this issue, I have pulled together a few practical examples relating pay levels and business objectives.
My thoughts regarding the overall topic of pay and business are pretty simple. From my point of view, every compensation system should be able to answer the following question:
What results are you looking to achieve when you spend a dollar for pay, incentives, benefits, or any of the components of an employee's earnings?
Whether we are discussing the earnings of the CEO of a company, a professional athlete or actor, a politician, or even the allowance of a child, the connections that need to be clearly identified are: what is the person expected to do to help their organization succeed; and what has the person actually done to earn their pay?
To illustrate this point, let's consider a simple business example not related to people and pay: How might a company go through the process of deciding whether to spend money on a new computer system?
For the company, the initial questions to be answered include: 'What will the new equipment do to make the business more efficient, effective, and productive?; and, 'If we spend a dollar on new equipment, how will that translate into the Company earning that dollar back in revenue or saving that dollar through reduced expenses?'. Only after getting through these questions will the focus shift to finding the best computer to do the job at the best price.
To translate this business decision into compensation terms, I can draw on my own experience early in my business career. I was working in the operations area of a bank that was responsible for transferring money between companies. In today's terms, my group helped companies pay their bills online. Part of my job was to recruit and recommend pay levels for new employees. After one lengthy recruiting process, I brought a new hire request package to the senior manager to get final approval. We were planning to hire a new computer programmer and, for this example, we'll say the base pay package was $50,000/year. I walked into the manager's office and requested his review and approval. He looked at the new hire form, looked at the job description and organization chart, reviewed the resume, and then took his calculator out. I waited nervously for several long moments while he punched in a few numbers. He put down the calculator, looked me in the eyes and said that in our business, each time we transfer money from one customer to another, we make a profit of 10 cents. So, if we hire this new employee for $50,000 a year, we will need to either:
Add 500,000 more customer transfers a year - or -
Reduce expenses by $50,000.
After a little discussion, the new hire was approved, but his logic has stayed with me for 25 years. For every dollar spent to pay employees, how is the business improving to earn the money needed for the paycheck? And, the money needed to support each employee is not just payroll dollars; employee expenses also include costs such as benefits, incentives, retirement, training, facilities, and equipment.
Today, that same question is in the news everyday: How does the money we pay someone relate to their contributions to the success of the business? Whether the pay discussion involves Wall Street bankers or entertainers, trying to identify the link between pay and results is critical.
This is not a new topic for the media. For example, the sports pages are regularly filled with headlines about overpaid athletes that are strikingly similar to the headlines in the papers about overpaid Wall Street execs. One such controversy was when Alex Rodriquez - A-Rod - signed a deal with the Texas Rangers to earn about $23 million per season. With additional bonuses and incentives, the total deal was worth $252 million over 10 years. Agree or disagree with the amount of money being paid, one advantage of looking at an athlete's pay is that you can always easily track how the athlete is performing and helping the team. Although the Texas Rangers continued to have a disappointing record, as an individual contributor, A-Rod set several batting records, was selected for the All-Star Team, earned the Gold Glove Award and was named the American League Most Valuable Player in 2003 while with the team.
A-Rod was not the only baseball player to be questioned about pay and performance. Around 1930, Babe Ruth was asked how he felt about holding out for a salary higher than that of Herbert Hoover, the President of the United States. Ruth's reply was: "Hey, I had a better year than he did."
Whether it is Wall Street, Baseball, or for some of us, how much allowance to pay our kids each week, the question is the same...
How does the compensation paid relate to the results achieved?
Bob Haertel CCP, CBP, GRP is a Principal with Roanoke Consulting LLC.
What You Earn ™ provides financial planning for individuals and compensation / benefits consulting to companies. What You Earn ™ is wholly owned and operated by Roanoke Consulting LLC.