Pay. It’s the topic we love to avoid. We don’t discuss it with friends or family. It’s verboten at cocktail parties. Heck, we discuss cancer, religion, and abortion at dinner parties more easily than we talk about our paychecks. We don’t even like to discuss compensation with the person whose pay we’re messing with.
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Well, you know me—I love to talk about the topics everyone avoids. Why? It opens a conversation we, as leaders, desperately need to have.
So in an era of wacky pay debacles (paging Dr. Lewis, Dr. Ken Lewis to the boardroom, please), how do you as a leader and executive navigate paying your people (or not paying them, which might be just as well deserved)? How do you personally handle getting paid what you’re worth without having angry mobs chase you with pitchforks and torches on their way to key your car?
Tough stuff, but let’s tackle it. First, let’s cover why we get into trouble about pay, then discuss how you pay your folks, and finally how you ensure you get paid what you deserve.
Why we get in trouble
The biggest mines you can step on in the Banana Republic of Compensation are failure to have or follow metrics, “fear of flight,” communism, and do-overs.
No metrics
Many pay debacles are caused because people get “paid for performance,” but no one knows what they were supposed to perform. Absent solid, measurable metrics, pay for performance is a joke. The only thing worse than that is paying people even if they don’t hit their numbers. Stupid? Yes. Does it happen? All the time. And many of you know I’ve opined on why hitting the numbers is stupid.
How do you personally handle getting paid what you’re worth without having angry mobs chase you with pitchforks and torches on their way to key your car?
Fear of flight
The “fear of flight” sob story goes like this: “If I punish him for not making his numbers, he might quit.” My perspective: So what? He missed his numbers. He didn’t get a bonus. If he can’t correlate the two and quits, you’re better off not having that kind of “leader” in your organization. If you give him his bonus anyway, that's foolish. Sorry, but it has to be said.
Communism
Communism occurs when we “differentiate” pay for people with no differentiable delta between high and low. You know the scenario: The “poor” performer gets a 1.05% raise, and your “high” performer gets 1.68%. Wow. Seriously?
Why does communism happen? Because we’re afraid to slope compensation aggressively on either end of the scale. It also happens because we do a lousy job of budgeting for such sloping at the beginning of the year, so at the end of the year we have no money left to make a meaningful slope. Plan for it, people. Plan. Budget. Please.
Do over
The “do over” happens when we miss our numbers and say, “Well, the market shifted, so we need to reset our original target and Wow! Look! We made our bonus!
Um. OK. Again, this speaks to a weakness of leadership to hold people accountable for what they signed up for. Seriously, when is the last time someone had a great year and you went back and said, “Well, the economy was cooking, so we need to reset our original target and, oh, sorry, now you don’t get a bonus.” Never happens, right?
There. I’ve vented. I feel better. Now, on to the fixes.
Paying your executives
I know executives have very difficult jobs. I’m not kidding on that point. The benefit, though, is they’re compensated very well for the pain, stress, skills, education, and leadership that are required in their jobs.
The best thing you can do with those executives is split their pay. I like to call it the “commit” and the “stretch.” The commit numbers are the numbers that they have to hit or you fire them. They’re signing up for those table stakes. They’re very attainable (note I didn’t say easy—I said attainable). If they hit those metrics, they should receive a reasonable reward in the form of a base bonus.
The “stretch” targets are the ones where that leader must bust their butt, be creative, be a great leader, a strategist, and an all-around outstanding performer. If they hit those outsized targets, their bonuses and comp should be outsized as well. The best way to stay out of trouble on the size of “outsize” is to have the compensation sloped gradually from the commit to the stretch, and then cap out at some level above the stretch. Stretch goals can be powerful motivators for high-performing leaders and teams.
Again, where we get in trouble with exec comp is it’s either uncapped on the stretch, no one gets fired for missing the “commit,” or there’s no concrete goal to begin with. You’re a leader. I challenge you to hold the line this year on setting goals and sticking to them even if it means doing difficult things like not giving bonuses.
Getting paid yourself
If you’re reasonably interested in your own comp, I highly suggest you take an active role in setting your goals this year. If you end up with a messed-up goal, you have no one to blame but yourself if you didn’t insert yourself in the process and try to influence the organization to adopt more reasonable goals.
Spend some time laying out your notion of what a “commit” and a “stretch” set of targets are. Explain the concept to your boss. Get her on board with the notion of being able to can you if you miss your commit, as well as paying you well if you nail your stretch.
Once you have smart goals established, get out there and execute. And document. Document well. Document everything that goes well (so you can demonstrate you hit your commit) as well as where your misses were (so you can fix them the next time around). By the time you reach the end of the year and you’re ready for your bonus review, you’ll have your self-appraisal already written (which we know is a critical element of getting paid what you’re worth).
What do you folks think? How do we need to fix compensation and the practice of dishing it out? What techniques have you seen work? Not work? Let me know in the comments below.
Published March 27, 2024, on the ThoughtLEADERS blog on Linkedin.
Comments
X + Y + [XY] = 8
X + Y + [XY] = 8
X = the contribution of the individual
Y = the contribution of the system
[XY] = the interaction of the individual with the system
8 represents defects per hour, $8MM in sales, whatever you're measuring
Whoever can solve for the value of X is fit to rate people on their performance.
--W. Edwards Deming
Let's manage by Goals (Objectives)? Let's not.
Let's pay for performance? I've heard of the Red Bead Experiment, let's not.
Is this a blog about resurrecting the prevailingbl system of management that Deming fought for most of his life?
The danger of metrics
If the level of performance is defined by metrics, numbers and KPI's, Finlay's Law and LePard's Corollary will apply.
Finlay's Law: When any metric or KPI is used to influence compensation or evaluation, the people being measured will figure out how to score high on the measurements while not doing their jobs, and they will figure it out in three hours.
LePard's Corollary: Finlay is wrong. It takes much less than three hours.
Disappointing
This is what we feared when Deming died...that the most important pieces of his philosophy would be lost to managers who never really got it. The system of profound knowledge includes understanding variation, systems thinking, theory of knowledge and psychology. This article describes and perpetuates some of the most destructive aspects of MBO that arise from a lack of profound knowledge.
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