When I first thought about this idea — that a lot of what we do in the compensation world is to follow the leader — it was the children’s game that came to mind. Remember – if I’m the leader and I skip in a circle, you do to; if I put my right-hand pinkie finger in my ear, you do too. Sort of a cousin of Simon Says.
Then my mind went to what really happens when we play follow the leader in compensation. Maybe some or all of this has been on your watch:
- We let market data dictate what “we believe” jobs are worth and how employees are paid
- We design incentives based on how our competitors do it, or how the VP did it at her last company
- We enable management’s somewhat mistaken belief that benchmarking is the only valid approach to program design
When we play Follow the Leader, we handicap our creativity to align our reward programs and systems to our unique business philosophy, strategy, objectives and values.
Give Up On Benchmarking?
It’s not my intention to totally scrap the idea that we can learn from others. Some of the best learnings I’ve had in my career have been from people that have faced challenges and found unique solutions that worked. For years I kept paper copies of presentations I had attended at conferences, industry meetings, consultant presentations, etc. And I did go back over them to pull out ideas, but I didn’t take that material and just paste my current company logo in the upper left corner. It did help though to add elements to programs that would fit the needs of the problem I was trying to solve. For example, should a bonus program have a payout threshold? Should a vesting component be used? These are ways to put real value into company bonus, sales incentive and executive compensation plan designs.
There are other aspects of benchmarking that I am solidly behind (especially when it reinforces my own beliefs!). Of course, many pay programs are benchmarked to a local market – Seattle, Los Angeles, Phoenix, you name the location and that’s probably right when it comes to certain jobs and levels of pay, for example non-exempt work. And for example, I see pay practice surveys that show the quantitative metrics participants use in their broad-based bonus plans and the prevalence of that. (I’d bet right now that not many readers of this know what EVA is, but I worked in a company once where it was the primary metric in the employee bonus plan). I could easily show how it simply wasn’t appropriate for the level of employee that needed to understand it, but it took an executive departure before we could wrestle that one down.
(By the way, bonus points if you know the answer to this related quiz question. What are the two most common quantitative metrics that companies use for their bonus programs?)
Now with COVID this last year, we’ve all heard (herd?) of Herd Immunity. One of the more common applications of the compensation ‘herd mentality’ is on market pricing of jobs. If you are an old-timer like me, you probably know that at one time, job evaluation systems like point factor, classification or factor comparison systems were more prevalent than market pricing. And if you haven’t taken C2 (the job evaluation class) from WorldatWork, you may never have heard of those. But much more so than market pricing, they enabled companies to determine how to pay their employees when they selected what was important to them rather than letting the market do it for them.
I still tell my clients that “the market is… interesting… but don’t let it tell you what to do.” What I mean by that is this: Follow the Leader isn’t always your best choice. And as a trusted advisor in your company, take heed that if you are going to play that game then you know what you’ve signed up for.
Quiz Answer: Revenue and Profitability
——Jim Harvey is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 35 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.
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