You Can't Pay Less and Get More

By Joel Myers 

I read an article recently that identified ways to cut compensation costs.  In descending order, the following list represents the top 10 ideas:

  1. Change the mix of salary and bonus structure.
  2. Reduce the size of the merit increase.
  3. Institute pay-for-performance.
  4. Hire more part-time employees.
  5. Establish/expand salary benchmarking.
  6. Change top executive pay structures.
  7. Add to benefits while holding the line on compensation.
  8. Institute broad-banding.
  9. Reduce the size of bonuses.
  10. Downsize/reduce staff/restructure.

The whole notion of looking toward a reduction in employee compensation as an avenue for improving the bottom line strikes me as being shortsighted.  We all know that we can’t save our way to success in business.  We have to get out there and delight our customers with products and/or services that represent a good value and that are delivered in a way that people enjoy working with us.  How motivated will our employees be to carry out these two simple strategies after we have successfully implemented a plan to reduce compensation cost by a significant percentage?  Somehow, paying less for equal or greater results doesn’t sound like a sellable proposition.

Personally, I would like to increase my employees’ compensation.  I would like to be a 75th percentile payer year after year.  The only condition is that they must earn it!  No entitlements!  No unrealistic expectations on either side!  No surprises!

In most businesses, we depend on employees to carry out critical roles.  Every job and each employee is indispensable.  No matter how large the company, we can’t afford redundant jobs or ineffective employees.  Every employee should find challenge in their work, should feel that their contribution is valued, and should receive fair and equitable compensation for their commitment to the company.  There is balance in the employee/employer relationship.  As an employer, we should not expect more from our employees than we are willing to pay for through tangible and intangible rewards and recognition.  Conversely, our employees should not expect to receive rewards and recognition that are not earned, but the rewards that they do earn and receive should be commensurate with their investment of time, talent, and effort.

If we cannot or choose not to pay fair compensation for the work that we expect from our employees, perhaps we should reconsider our business proposition.  Maybe we should be in a different line of work.  We simply cannot pay below market and expect to attract and retain good people.

When we look at employee compensation as an investment (as we do any business investment) it puts things in a different perspective.  With a piece of machinery, we are prudent about making the investment in the first place.  We carefully consider the functionality of the machine relative to our immediate and long-term needs.  We consider how the equipment will fit into and enhance our production scheme.  We consider if the machine is easy to maintain and how adaptable it will be as we grow and our needs change.  We consider the cost, balancing quality and features against the economic investment.

Finally, we have quantifiable measures that tell us how the new machine is contributing to our overall performance.  The same should be true of our investment in our human assets.  We should specify the job that is to be performed in terms of measurable output.  If we are not clear about how a job will enhance our operation in terms of service delivery, revenue generation or operating efficiency, we should delay filling the position.  We should select the right people in terms of their technical capabilities, their related experience and, perhaps most important, their personal chemistry that make them a good fit with our culture.  We should set a pay level that is externally competitive, to be able to attract the most qualified candidates, and internally equitable, to encourage retention and discourage employees from looking elsewhere for fairness.  Finally, the way we deliver pay should motivate achievement and personal growth.

Back to the top 10.  It isn’t that these 10 strategies are bad, it is the notion of applying them with the goal of cutting costs rather than encouraging performance that is questionable.  These are good strategies to employ when you want to strengthen the relationship between pay and performance. 

Any well-designed reward system should meet four basic objectives:

  1. Be motivational – link rewards and recognition with individual behaviors that are beneficial to the organization.

  2. Support the organization’s priorities – once the organization is clear about its highest goals, rewards and recognition should reinforce progress toward achieving those goals.

  3. Support the organization’s culture – every organization has a soul or culture that defines how work gets done and how associates interact with one another.  Rewards and recognition should support and advance positive cultural values.

  4. Be cost effective – thinking of the economic expenditure in reward and recognition systems as an investment in the business, we should expect and strive to achieve a reasonable return on that investment.

The goal in applying any of the top 10 strategies should be to drive performance, not reduce expenses!

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