IN SEARCH OF THE HOLY PAY GRAIL

THE TRADITION: PAY FOR STATUS

THE PRESENT, THE FUTURE: PAY FOR CONTRIBUTION

Status, not contribution, has been the traditional basis for the amounts on people's paychecks:

·         pay was based on hierarchical position, regardless of performance;

·         status burdened the organization with weighty fixed obligations while failing to encourage or reward entrepreneurial behavior.

Figuring out how much someone is "worth" was never a very accurate process.  Traditional organizational pay rates have reflected such characteristics as:

·         decision making responsibility

·         importance to the organization

·         number of subordinates

·         years of service

·         incumbent related to. . .

·         possessor of negatives of photos taken at the office party;

Status was the basis, the standing of a job in the hierarchy of organizational relations.  Each job came with an assigned pay level, regardless of how well the job was performed or the real value that performance produced for the organization.  The surest way to increase the paycheck was to get promoted or change employers.

Traditional pay scales were and still are customarily rationalized by asserting that "the Market" ultimately determines pay.  All the market really does is reasonably assume:

·         that people occupying equal positions tend to be paid equally;

·         that people with similar experience and education tend to be worth the same;

·         that jobs in shorter or greater supply than the demand have price tags that go up or down.

FROM STATUS TO CONTRIBUTION

Employers should no longer believe that rewards for status are cost effective. 

Employees should no longer believe that rewards for status are fair and equitable.

Innovations in compensation are necessary to succeed at the "doing more with less" balancing act: lowering fixed costs,

·         compensating fairly,

·         stretching capacities, and

·         encouraging new ideas.

Traditional pay systems cause four separate but closely related "do more with less" concerns:

·         cost - present system is too expensive;

·         equity - present system is not fair;

·         productivity - present system is unable to motivate high performance;

·         entrepreneurial pressure - present system does not adequately reward

·         people for improving performance or creating new sources of business.

Employers and employees agree that there are two desirable attributes for any pay system:

·         keeping costs down for the organization;

·         being fair to all concerned.

The questions: How to spend less?  How to encourage people to do more?

The answer: change pay determination from status to contribution, from position to performance.

And so, the quest began.

Feudal lords set out to find the healing amulet; the grail of compensation; the pay system that keeps costs down, is fair to all concerned and "works."  They searched and searched the far reaches of Payratedom.  Herein are some of their searches.

PAY FOR MERIT

Merit pay is a conservative compromise between reward for status and reward for performance.

In its most common form, it retains the power of the lords over the serfs as they bestow raises based on their judgment of contribution.  It has the appearance of fairness and encouraging higher levels of productivity as serfs learn that they will get more back if they put more in.

LogicAlert: The difficulty is in making performance distinctions and the lack of meaningful increases.  The serfs question lordly skill in awarding effort with raises.

Food for thought?  Estimates of the threshold for a meaningful increment range from 10 to 15 percent.

The quest continued.

PAY FOR FIEFDOM SUCCESS

Fiefdoms of every industry and discipline are seeking ways to reduce the fixed cost of labor. 

One way is to gear pay to performance of both the fiefdom and the serf.  One time performance awards, spot bonuses and profit sharing plans begin to seem very attractive as ways to limit salaries and wages while offering the promise of extra earnings for those who truly contribute.

Part of the motivation for performance bonus and incentive pay is to stimulate productivity.  The other part is retention oriented, to keep valued serfs by giving them opportunities to take the initiative to grow their own paychecks.

Profit sharing is a straightforward arrangement in which a fraction of the net profits from some given period of operation is distributed to serfs.

Gainsharing takes profit sharing one step further by attempting, usually with more or less elaborate formulae, to calculate the contributions of specific "fiefteams" of serfs with their pay based on the varying results.

Gainsharing programs require open communication regarding:

·         fiefdom goals and fiefdom performance;

·         rewards to be shared and basis for their distribution.

One Gainsharing approach works on the theory of distributing a certain percent of gains to serfs and a percent to the fiefdom.  It spells out in detail how serfs at various levels will participate:

·         in control of the process;

·         in the opportunity to improve performance;

·         in the opportunity to improve share.

LogicAlert: Gainsharing recognizes value of groups rather than individuals.  By distributing across the board bonuses to rather large work units, fiefteam work is strengthened but the individual pay and performance link is weakened.

Food for thought?  What happens when Gainsharing involves sharing the loss as well as the gain?

And the quest continued.

PAY FOR SKILL

Pay for skill is a clever approach stressing individual responsibility without pitting fiefteam member against fiefteam member contesting for highest ratings.  Serf pay is geared to the number of tasks learned and performed well.  This encourages individual incentive to upgrade performance rapidly.

The basic pay for skill unit is a fiefteam responsible for all aspects of production: performing the work; inspecting product quality; keeping records.  The members of the fiefteam are rewarded according to their capacity to manage their own work.  Therefore it is advantageous for every member of the fiefteam to have highly skilled colleagues capable of fully sharing the load.

LogicAlert: To insure that increased skill is used on the job, a portion of pay is contingent on performance based on fiefteam evaluations.  This causes peer pressure.  To insure that the increased skill is used on the job, lead serfs must supply the work requiring the use of that skill level.  This causes the pressuring of lead serfs to continually supply that level of work.

Food for thought?  What happens when there is not enough of that level of work to go around?

Where to go now?

PAY FOR CONTRIBUTION

Pay for Contribution?  Can the quest be over?  Do we have the answer, the amulet, the grail?  And did we find it resurrected from the beginnings of the Free Enterprise System?  Serfs having the responsible right to pursue a livelihood; to work at a job of their choice; and to be encouraged to succeed through profit incentives?

The approach is Return On Contribution.  The concept is "owning a piece of the action," running a piece of the fiefdom as though it were an independent business.

ROC is a program of setting up new "ventures" with a piece of the action for the "adventurers" of the fiefdom.  "Ventures" can be performance periods, accomplishing projects and goals, improving or inventing products or services.  "Adventurers," serfs, employees can earn a return on the marketplace effect of their contribution.

Result: hunger for the next "venture," the next "contribution."

LogicAlert:  But this time, the reality is aimed at the feudal lords.  At the start, lords must evaluate performance needs, projects and goals; set product and service improvement parameters; and assign priorities.  Then, establish a "value of impact" on the contribution and translate it into a reward.

Food for thought?  Can the lords handle that?  If so, then the lords (management) and the serfs (employees) will reap the benefits!