One for All and All for One
Intro: In the world of variable pay, the art of fairness is not always aptly mastered. A short article on what we at BD Advisory see as a foundational premise within the world of variable pay, that everyone should not be treated the same.
While in the process of writing my proposed doctoral topic (linking pay cost management to the establishment and/or disallowance of business results), I came across a cool article. The title is wordy… but it is fascinating: “Performance Pay and Multidimensional Sorting: Productivity, Preferences, and Gender." It was written by Dohmen, Thomas and Falk, Armin and published in the American Economic Review**.
Here are some of the provocative antidotes:
- Output for variable pay systems, far exceeds those of fixed pay systems.
- Variable systems can create sorting mechanisms that discourage certain kinds of employees or great performers, in their specific field, from staying.
- Even those who hate this kind of performance pressure, will achieve better results. Meaning, if put under these variable schemes they will achieve more, but—and this is critical — they will sort themselves out of these pay systems and will leave if required. This sorting, therefore, can potentially harm the company where such important individuals would be best fitted to fixed pay systems as the dominant component of their total cash.
- As a whole, the researchers also found that females do not favor variable pay as a standard for performance systems, which is interesting when considering equal pay, and the high value that females bring to the workforce (read the article).
- Certain high performing individuals, with a mindset to perform, welcome meritocracy and the differentiated pay based on differentiated results and find variable pays systems that accurately measure their performance as a preferred mode of pay for performance.
Before saying this cannot be true, remember, this is an academic paper meeting the rigors of strenuous peer review for one of the world’s most prestigious Economic journals. And yet, what do we predominately see in variable pay designs? For the most part, we find the following:
Everyone is treated the same.
1. Many employees, regardless of type, even when normalizing the data with the elimination of sales positions, are for the most part in the same pay variable system.
2. All employees as a whole within their identical grade types have the same percentage of collective to individual performance in their variable bonus scheme. So marketing, finance, HR etc. found in the same grade, would have the same bonus scheme.
Just as lions do not eat hay and horses do not eat meat, we should,
perhaps be mindful of how variable pay systems impact sorting.
Everyone needs their own kind of food.
Yes, administrative complexity might limit this possibility. But remember what small agile businesses do – they differentiate. So, the question for all of us is:
What can you do to ensure that you have the right people sorted in the correct performance driven systems? And would it not, perhaps, be lovely to have the right profile of person in the right job with the right variable pay system allowing for the research to bear itself out with higher productive results?
Something to think about. This reminds me of a recent conversation I had with a CEO of a large NGO who, when he discovered my vocation, was quick to ask: “Can I pay some people in the same grade significantly more based on the value they create?” “Why do you ask?”, I replied. “Well, my Global Head of HR says that because all jobs have been appropriately sized, I must adhere to the pay band that each grade dictates."
I replied that this does not have to be the case. “Really?”, he replied. I clarified that as long as the governance is clear on the jobs that have been defined as creating significant value, and as long as the practice is not arbitrary and capricious, you can pay them as strategy requires.
This variable research says the same thing. We should not treat everyone the same. We should have variable pay systems that through their design can, to borrow a phrase from Harry Potter, sort the right people into the right house (job). Does it require magic? No. Just hard work.
** Performance Pay and Multidimensional Sorting: Productivity, Preferences, and Gender (Dohmen, Thomas; Falk, Armin.The American Economic Review; Nashville Sv. 101, Čís. 2, (Apr 2011): 556-590. DOI:10.1257/aer.101.2.556).
Michael is a senior Total Rewards leader with 26+ years in the field. He comes to us from Nestlé, where over the course of his career he held leadership roles on both the compensation and benefits side in their global Total Rewards organization in Switzerland, China and the USA.
Author of this Article