Why are the compensation offers you were making three years ago no longer helping you land the talent you want now? Chances are it is because you haven’t made “the shift.” And what is “the shift?” It is the change business leaders have had to make over the past year or two in the way they think about their employee value proposition. It stems from another “shift” that has occurred in that same time period— where a scarcity of skilled talent has put top performers in high demand. Every business is now feeling the pressure to come up with something “better” so they can compete for that talent. As a result, old formulas have to be thrown out and a whole new approach adopted. And that is why the compensation offers you used to make aren’t cutting it anymore.
Three years, Tim Low, senior vice president of marketing at PayScale, made this prescient observation in Harvard Business Review:
…it’s no longer good enough for hiring managers to play it by ear or approach compensation as a dark art. This requires a cultural evolution for companies that used to rely on gut feel when it comes to compensation. Firms that want to attract somewhat elusive highly skilled and highly desirable professionals (a “purple squirrel” or “unicorn” in HR circles) need to get serious about getting pay right.
For positions that are in demand — such as many IT and engineering jobs — hiring managers may find they need to pay 10 to 20% more than they anticipated to attract the right employees. And in some cases, these people are being lured from industries that are completely different from yours, and thus have different expectations about pay.
Certainly, the need for the “cultural shift” Low describes has only increased since he made that observation.
So, what should you do? How do get oriented in this “new world” of pay design?
Unfortunately, there is not a “one size fits all” or silver bullet approach to developing a highly competitive compensation strategy. Like all other aspects of your business, you need a strategic framework for evaluating the role rewards will play in your company and what philosophy should guide your approach. However, there are some principles that apply universally when it comes to building a pay offering in the present environment. I’m calling these guidelines “secrets,” because that’s what they are to business leaders who have yet to make “the shift.”
1. Forget About Market Pay Data. Information provided by data shops is becoming less and less relevant to today’s pay design practices. There are several reasons for this. 1) Jobs are becoming more specialized than ever before, particularly as technology advances. Now, there are not just industries, there are micro-industries. As a result, it is harder to generalize data by position. 2) Teams are often spread across broad geographic regions—even multiple countries. This makes it virtually impossible to standardize salaries, no less various types of incentive plans. Statutory requirements, tax law and a multitude of other factors that differ from country to country disrupt a company’s ability to make strategic pay decisions based on compensation data. 3) Organizations are competing for talent across industries. For example, it is no longer just tech companies that need software engineers. They are needed in virtually every kind of business. So, how do you standardize data in such a broad-based talent environment? 4) Premier talent is more informed than ever before. Because of online services, social media and other aspects of our current business environment, compensation information is less hidden and more transparent. In addition, by their very nature, high performers know how to create value. As a result, they expect to see a relationship between the value they create and their earnings. None of that will be reflected in market data analyses.
2. Define Your Value Creation Model and Expectation. Forward thinking companies work within a performance framework that is continuously focused on where the company is headed next and what it is going to take to get there. Part of “what it is going to take” has to do with knowing what outcomes its business model and strategy need to produce—and what roles are needed to fulfill them. This helps them determine how value creation is defined for the business.
Once a company is confident about its value creation formula, it is easier to develop a philosophy about how and with whom value should be shared. It becomes a kind of “reverse engineering” approach to developing a compensation philosophy and strategy. The question becomes, “What am I willing to pay to get that outcome?” Think of it this way. If you own a business and are looking to secure the talent necessary to grow your company value from $20 to $50 million over the next five years, how much of that $30 million increase are you willing to share to produce that outcome? 5%? 10%? 15%? In part, the answer is: “Whatever is required to secure that $30 million outcome,” right?
But this is not how most organizations think about compensation. They treat it as a cost that needs to be managed and contained instead of an investment designed to drive a certain result. That kind of thinking will not get you the talent you want in today’s business world.
4. Explore Your Potential Recruit’s Compensation “Mindset.” Too many employers reach the “offer” stage in their hiring process without ever exploring the compensation expectations of the person they are trying to recruit. To be clear, I’m not suggesting you let the person you’re recruiting write their own term sheet when it comes to pay. But you don’t have to go that far to get a sense for whether or not the person you are trying to recruit will relate to your philosophy about compensation in general and value-sharing in particular.
The conversation you have with a potential employee about compensation could include questions like these:
- What appeals to you more, having high guaranteed income with modest incentives or a more modest salary with high (perhaps unlimited) upside potential through value-sharing?
- What is more important to you, having a pay package that throws off generous earnings every year or one that pays you “fairly” for your annual contributions but rewards you handsomely if you help produce significant company growth over time?
- Would you rather negotiate a performance contract each year that ties your compensation to the achievement of well-defined financial results or have a more traditional pay arrangement where you are given a salary, bonus and benefits?
Now, those might not be the exact questions you would ask, but you get the idea. Think about how this kind of information would help you in formulating a pay offer for the talent you are trying to hire. Consider also what the answers you receive will reveal about that person.
For example, suppose you are recruiting a chief revenue officer who you would hire with the expectation of helping the company triple revenue in the next four years. But in the course of your discussion about compensation, the recruit indicates he would really prefer a “no risk” approach to pay where he is given a high salary with modest incentives. What does that response tell you about how suitable this person is for the role you have in mind for him? Is he going to “own” the outcomes you have designed for his role? Probably not.
There are many reasons your pay strategy is probably not competitive right now. Certainly, these three secrets or principles don’t tell you everything you need to know to produce a complete and compelling pay strategy. However, they should give you a good framework within which to examine your current practices and to consider how you might approach things differently going forward as you attempt to compete in our existing talent environment.