Determining employee salaries: reward performance over seniority?
July 6, 2015 1:28 PM   Subscribe

I'm trying to decide on a best compensation model for paying my employees (help desk staff at a software company); looking for any and all writings on the subject.

The rest of the company is currently implementing a new model that will essentially disregard seniority (spent with the company) as a factor in calculating a new salary each term (four to six months); instead, performance will be evaluated and each employee will be placed accordingly within a predetermined salary range for each position. Theoretically, the salary range for each job will be adjusted each term based on research into industry averages. I'm being allowed to stick with my current model, go with the new one, or come up with some third option.

I'm concerned that the new model will be bad for morale. It seems to me that people tend to expect a regular raise for consistent good performance, and this new model could very well lead to a no-adjustment scenario or even a decrease--an employee that performed 10-out-of-10 one term but only 8-out-of-10 the next, or an employee that performed better but in a job judged to be paid less well across the industry as a whole from one term to the next.

Anyway, I'd rather not be reinventing the wheel here. Employee compensation has been the subject of dozens of Harvard Business Review articles, many of which I've read in the past week--I just can't seem to find quite the right ones yet. Can you help? What other books, articles, or studies are out there on this subject?

posted by Mr. Professional to Work & Money (19 answers total) 4 users marked this as a favorite
Will you have a COLA increase in addition to performance based increase? Because everyone's cost of living increases with time and not giving that means you're giving people a pay cut every year.
posted by latkes at 1:32 PM on July 6, 2015 [6 favorites]

I would argue that, aside from the points you bring up, a longer term employee likely brings some benefit to the company regardless, due to greater experience. It's in a company's interest to keep good employees around, even if not everyone is a rock star, because inexperienced employees require lots of investment in the form of training before their value will start to be recouped by the company. If employees' compensation doesn't increase over time, well, more years of experience still makes them more attractive to other employers, even if they're middle of the pack.
posted by mister pointy at 1:48 PM on July 6, 2015 [6 favorites]

It seems to me that people tend to expect a regular raise for consistent good performance, and this new model could very well lead to a no-adjustment scenario or even a decrease...

This will absofuckinglutely demolish morale. It's one thing to tell an employee "Well, you weren't performing as well as we'd like, so you don't get a raise this year." It is an entirely different kettle of fish to say "Well, you weren't performing as well as you personally did last year, so we're cutting your pay."
posted by Etrigan at 2:07 PM on July 6, 2015 [10 favorites]

Will you have a COLA increase in addition to performance based increase?

The theory is that the cost-of-living increase will be built into the industry-average numbers. But I'm not so sure that in practice our research can be precise enough to reflect an annual COLA increase; I'm worried that a too-small sample size or incongruent data from year to year may lead to us thinking that a salary for a given position has gone down year over year, for example, when it really hasn't. This is part of my concern with the new model.
posted by Mr. Professional at 2:08 PM on July 6, 2015 [1 favorite]

At my job it's broken down into three factors:
* CostOfLiving (applies to every one equally)
* Industry adjustment (depends on job title)
* Performance (specific to individuals)

The 3 different numbers are combined to produce the pay adjustment (eg: 1% COL + 5% IA + 2% P = 8% raise)

You might also want to look at regularly evaluating whether job titles are accurate, as this will help you to buffer any decreases. Help Desk Analyst is -2%? Well you're now a Support Technician (+1%), etc.

Also, industry averages do NOT usually incorporate precise-geographical differences, so unless you work in the cheapest possible place to do a specific job, your numbers will be biased downwards.
posted by blue_beetle at 2:16 PM on July 6, 2015 [7 favorites]

So you could do a lot of reading on this in general, but if you're going to have to sell this decision to management, I think the one of the things you need to think about is the relative benefit gained from an X% increase in performance (what does that really mean in the context of your help desk?) versus the time, energy, productivity and resources taken up by losing an "average" but dependable help desk worker. What does that balance look like for your team? How easy/hard is it to find and train replacement staff? If you can start weighting these things in terms of some unit of Overall Help Desk Performance, you'll be able to construct a business case for going with a different model that's specific to your organization, but with a little more thinking behind it than just going with Hot New Compensation Trend From MBA Researchers or Gut Feel On What Works Best For Us.
posted by deludingmyself at 2:33 PM on July 6, 2015 [2 favorites]

I have to say, as a business school grad, that the plan sounds absolutely bonkers and it's likely to backfire tremendously unless there is already a very high rate of employee turnover. I think this sort of plan also really sucks for management too. Is there a professional HR employee who is truly on top of salary research, or will other managers like yourself have to research it? I can also see how, like with this question, a manager will seek to protect her or his team and may manipulate performance or industry statistics to do this.

Anyway, you understand intuitively that this plan is not a good one. I wonder why your department gets a pass. You may want to consider why upper management is choosing this path and what the implications are for you and your team if you go your own way completely. What do they hope to accomplish - improve performance, keep salaries within a narrowly defined change, attract new talent, reduce labor costs, or ...? I also can see a situation of your team losing confidence in you if you shield them from a company wide change but then they have to change in 6 months to a year's time anyway. Something to think about.

blue_beetle, above, provides a good breakdown of how the different elements of COL, industry averages, and personal/department performance could be integrated into one raise.
posted by stowaway at 2:38 PM on July 6, 2015 [4 favorites]

I think right off the bat I'd need a pretty solid reason to differ from the rest of the company. Someone's going to be unhappy no matter what, and by differing you're automatically making them unhappy with YOU and YOUR stupid plan and giving them a "why can't we just do what everyone else does" grass-is-always-greener comparison.
posted by ctmf at 3:02 PM on July 6, 2015

Reductions in pay can under some circumstances viewed as constructive dismissal depending on what jurisdiction you're in.
posted by GuyZero at 3:35 PM on July 6, 2015 [3 favorites]

Not being able to rely on one's salary for more than 4-6 months makes your company a much less stable place to work, and introducing pay cuts will kill morale. Carrots are better than sticks here, especially when the stick is your salary dropping below what your mortgage (or your debt, or...) demands.

What kind of performance scale are you talking about? To the extent that it's subjective, how much tension will it add to employer/manager relationships? To the extent that it's objective, how sure are you that you're using the right metrics and that they won't lead to perverse incentives or unhealthy competition (not that competition is automatically unhealthy)?

This would be a big, negative deal anywhere I've worked. Granted, I'm in engineering, where employees are divas and retention is a problem, but I don't think the help desk teams would have taken this quietly, either.

As for articles, I'd search for "pay for performance" and filter out the industry-specific results (teaching, medicine), leaving articles like this brief one from HBR and this one with more links from the Kennedy School.
posted by orangejenny at 4:16 PM on July 6, 2015 [3 favorites]

There are, generally, two types of employees: cost-center and profit-center. Profit-center employees are typically paid for performance because the incentives are aligned. It kinda follows that pay for performance incentives are reversed for cost-center employees, i.e. the better those employees perform their cost-center functions, the more negatively it impacts the bottom line, in aggregate. The management can argue that they will set special performance goals that are not tied to profits but this cannot actually happen at a for-profit company, because it just can't. There will end up being a bunch of feel-good "soft" goals that will be superficially related to better customer care but the "hard" goals will end up being the cost-saving kind, such as the number of tickets closed etc. And everyone will know that these hard goals will ultimately decide their compensation package.

In practice, this is how pay-for-performance is going to go at a help desk: everyone will grab for the easiest tasks, medium-hard problems will get pushed around and onto the least competent person and/or fester until they turn into really hard problems, really hard problems will get "lipstick on a pig" solutions or just get swept under the rug, user satisfaction will plummet, the most helpful employees will get dumped on the most, and so on. I would fight for a more traditional pay structure and couch my arguments in some kind of a "help desk is a cost center so the incentives are not aligned" language.
posted by rada at 5:12 PM on July 6, 2015 [5 favorites]

I wonder why your department gets a pass.

Basically there are five department heads; two of them (who are also the company's co-owners) hatched this scheme together and two others have so far signed onto it. Theoretically any of the five departments could put forward an independent plan.

I also can see a situation of your team losing confidence in you if you shield them from a company wide change but then they have to change in 6 months to a year's time anyway.

I agree with you that it might introduce complications long-term to decide now to be the odd one out; that's part of what I'm weighing.

Excellent answers so far, thanks everybody!
posted by Mr. Professional at 6:30 PM on July 6, 2015

If I understand the plan correctly, you'd be potentially changing a person's pay multiple times a year to anything between $X and $X+Y. Each review would bring the possibility of a salary cut (unless they are making the minimum amount), no matter what they made the previous quarter or six months or whatever. It's the same as paying everyone at the lowest possible pay of the set range and giving them periodic bonuses as you see fit. (I mean, not actually, from an HR and taxes standpoint, but from the standpoint of an employee who is trying to pay for a mortgage and put food on the table).

You are asking employees to take on the risk of a variable salary for performance that will almost certainly not be 100% in their control (a task is harder than anyone predicted and takes a long time, customers are unpredictable, etc.). Most people working on non-retail commission or bonuses expect either a high base pay or very high bonus potential to make it worth taking on the risk of a bad quarter or year.

Also, do you have a legal department that has approved the new scheme? Salary cuts aren't like not giving a raise. I'd imagine you'll have to be painstaking about your review and rationale process, and you'll still be more open to lawsuits, even if the cuts arent constructive dismissals (which is itself a very good point). I don't have the knowledge to back this up, but I'd bet a decent amount of money that employees who get pay cuts are more likely to file lawsuits than those who simply don't get a raise. And you're potentially doing this to every employee multiple times a year?
posted by alligatorpear at 7:13 PM on July 6, 2015 [1 favorite]

It took dinner and a shower to dig up a forgotten term from the recesses of my brain: vitality curve. Look it up, there are many legitimate criticisms of it beyond "it doesn't seem fair."

Do you know why the owners want a new compensation schedule? I saw your previous question about salaries. It sounds like the managers have had a lot of latitude with compensation in the past and now there is a push to have a more rational system? If I were in your position, I would adopt the tiers but once employees level up to the next tier, they could never be demoted. I'd try to keep salary reviews as an annual thing - every 4 months sounds exhausting.

Also, I would urge the owners to run this by a competent labor/employment attorney who is very familiar with your industry. Too many pitfalls to list; others mentioned them above.
posted by stowaway at 9:29 PM on July 6, 2015 [1 favorite]

Do you know why the owners want a new compensation schedule?

Our policy so far has been to offer pretty attractive starting salaries and considerable annual raises, because the company has been doing well and it feels nice to pay people well. But the concern is that this method isn't sustainable--we're going to hit a point where people are making more money than their job duties' value to the business can justify. (I've been with other companies when this moment has come and has resulted in layoffs, so I'm happy to be thinking about it before we get to that point.)

So right now we're involved in our first attempt to systematically consider what salary ranges should be for different positions.
posted by Mr. Professional at 11:05 AM on July 7, 2015

Can you make the minimum annual portion be called "salary" and the perf-dependent part be called a "bonus"? People still get pissed about having a lower bonus than expected, but not the same way they do for a pay cut.
posted by Lady Li at 11:40 AM on July 7, 2015 [1 favorite]

In sales it's not uncommon for bonuses (or whatever you call the performance-based part of compensation) to be quarterly as opposed to annually. Which helps shorten the feedback loop for poor performers.
posted by GuyZero at 2:05 PM on July 7, 2015 [1 favorite]

I work at a large faceless corporation and I (and my coworkers) have noticed several things:
  • People who have been here longer get paid much more (sometimes as much as double as new employees.
  • People who have been here longer are often more productive than new employees but none of us can think of a single person who produces twice as much value for the company compared to any new employees.
  • Some people who have been here longer (and get paid much more) are less productive than new employees.
  • Once you're at your salary cap, the company has no mechanism to increase your compensation.
  • The company has no mechanism to adjust someone's salary downward to match their performance, so stay here a while, then feel free to coast.
To use the carrot and stick analogy mentioned above, when you first start, the company has a small carrot to offer (the annual raise cycle, though nothing too big) and a large stick (they can fire you, but can't do much else, aside from talking with you in an HR/lawyer approved manner). This doesn't change until you get to many years in and hit the salary cap in which case the company has no carrot to offer and still only the large stick.

Some companies (but not mine) do have an "up or out mentality" ... which at first seems unfair, but I see it as a response when they're told "hey, you can keep giving out raises, but once someone's performance isn't acceptable, you can't do anything.

The idea that people should be paid more for being there longer (that is, for managing to not get fired) makes no sense to me. If you argue that someone who was there longer didn't need to be trained, well that makes them more productive than someone who spent 3 months job shadowing. You're compensating on productivity, not tenure -- productivity is just harder to measure.

Similarly, if you argue that people who have been there longer have more experience and thus should be paid more, I'd only agree with you if having more experience meant they could (a) work quicker, (b) handle more complicated work newer employees couldn't, (c) work with fewer mistakes and/or (d) train new employees ... which again would mean you're really compensating based on what the employee is doing for the company, not by how long they've been there. (Presumably someone with 10 years experiences in the position outside of the company could do all of those things while a person who no experience couldn't. If they were both hired on the same day, would it make sense to compensate them equally?)

I also don't buy the argument that salaries can only go up, stay the same or be completely eliminated (by firing). Of course salaries can go down just as market rates for given labor can go down (and up) just as employee performance can go down (and up).

Would this be unfair to spring on someone? Sure, "Hey, Frank, while you're here, we've assessed your value to the organization for the past 12 months and feel you've been overpaid -- effectively immediately your salary is down 10% to match" is a dick thing to do. Have quarterly performance reviews and indicate to each employee where their performance is trending. At the fourth one, adjust the salary as indicated. Hopefully, if the hiring manager did their job right, most people will go up a bit or keep their current salary. If the salary goes down to match the productivity, either (a) the hiring manager over estimated the person's value to the company or (b) the person has been there a while and performance is no longer on par with the compensation.

But this is all rambling from a mere employee, not someone qualified to give any sort of legal guidance. Stick with what the rest of the company is doing so if someone gets upset and sues over it, it their decision and their lawyers, not your neck.
posted by Brian Puccio at 11:09 AM on July 8, 2015

Some companies (but not mine) do have an "up or out mentality" ... which at first seems unfair, but I see it as a response when they're told "hey, you can keep giving out raises, but once someone's performance isn't acceptable, you can't do anything.

This is why I like the government's paygrade strategy. I hire people below the full performance level, say GS-5 or 7. The good news for them is there are promotion (and pay raise) steps that are pretty much automatic with acceptable performance, which is what recognizes increasing domain knowledge, experience and seniority. But on my end, that's what makes sure the productivity increases commensurately. A GS-10's performance standards are not the same as a GS-5's. Someone could have been considered acceptable last year, but now the expectations are higher. I can always do something about not meeting the standards.

Once they reach the full performance level, it's not exactly up-or-out, it's up-or-stay-the-same, with limited pay raises that barely cover cost of living increases (and slow down over time according to a set schedule). They can compete for the higher job titles and get the raises that go with that, or keep doing what they're doing, but at the full performance standard, which is all I can realistically ask for.
posted by ctmf at 12:23 PM on July 8, 2015

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