This’ll be my last post for the next three weeks (roughly) as I’ll be vacationing with friends outside the country.
In our democratic society, we value fairness and equality, hard work and individualism. However, those are two sets of contrasting qualities. Fairness and equality take a general, balanced, view of a group while individualism highlights the vast differences, the inequalities, within that group, and hard work implies an imbalance in effort. Considering those qualities, what’s the right mix when determining compensation?
Whether you’re an employee looking for a raise or discussing compensation at a new job, or you’re an employer on the flip side, there’s usually no easy answer. As employees, we demand fair pay for performance. It’s only fair that if I do a lot of hard work, then I should be fairly compensated for that hard work. Of course, most employers prefer this option too because it means they’re also getting a fair deal, and only paying when it makes a difference. Or so the theory goes.
However, reality is that performance pay is possibly one of the most corrosive incentives a business can construct because they’re terribly hard to get right (assuming what’s right is “right” for an extended period of time), and when they’re wrong or off mark they easily alter coworker relationships and work results. If you pay a technical support person based on average length of customer support calls, assuming shorter calls means better support, you get technical support hanging up on customers when they hit a specific time limit to hit their mark (true story). If you give people incentive pay for not taking any sick days, then you get people coming into work sick (true story). Or similarly, in order to increase work safety at your coal mine, if you offer incentive pay based on the reduction in the number of accidents reported at work, then you get fewer people reporting accidents and fewer people going to the on site doctors and health professionals, but not necessarily fewer accidents (true story).
So, incentive can easily cause the wrong, if not exact opposite, reaction that it intended. That’s the most obvious challenge with incentive and performance pay. The next problem is that work is not done in a closed environment. Marketing and sales can’t sell a shitty product when competing with a great one (for instance: Zune vs. iPod. Interesting connection with the Zune too. The marketing company that Microsoft hired couldn’t do much to save or help the bad decisions with the Zune, but have made quite a splash with their recent – absolutely brilliant – campaign with the rock band Nine Inch Nails’ [NiN] newest album, in no small part to the band’s own decisions and openness).
Technology is usually a cost department and not a revenue generating department, but that doesn’t mean they have no impact on revenue. However, sales and marketing tend to get the better performance and incentive pay while technology is driven to cut costs and have to fight for bigger budgets. One feeds the other, so who should get paid for what? On a higher corporate level, performance pay is again becoming a driving topic for executive compensation. Executives earn more if share price goes up, and less if not. And guess what, since most stock price shifts are meaningless and short term, executives think short term (Enron is a prime example of this along with many other bad decisions). If you hire someone to be the company’s visionary and long term leader, but pay them for something else, what do you expect?
Yet, how can you get away from the fact that these people can cause the company to burn or boom, and consequently, not link what they do to how the company does? A runner’s feet need to hit the road at some point, and compensation should match results to some level. All that I can really come away from this, after years of thinking about this problem, is that all people at all levels prefer some kind of safety. Few people want or can get away with constantly fluctuating pay. We all have bills to pay, and having employees constantly afraid of making payments doesn’t produce productive employees. Also, in industries like technology where employees are driven more by what they do than what they earn, you’re faced quite the challenge producing motivation where you need it.
If nothing else, these challenges should encourage us to be more open. What fits one person may not fit the person doing the exact same thing in the next seat. As I said in my previous post on paying dues, employers need to be more creative and open, but so too do employees. In most compensation situations, money is the least important factor as happiness is key for the employee and progress is key for the company, so always make sure to have those two values on mind when dealing with pay and performance, and remember that employee happiness is primary to company growth and improvement.