In a previous post we learned why he believes that across-the-board increases are old news (never to return) and pay for performance is essential to success in the current economy.
This time, we talk to Mr. Smith about the crucial role that HR professionals can play in their company. He offers advice on presenting findings to executives, overall pay strategy and the value of an HR professional who can execute a pay-for-performance plan.
Q: How can HR professionals play a bigger role at their company?
A: The way to do that is to show up to the meetings you have with the people who make the decisions prepared with information and data. You shouldn’t just say, “I think we should pay people more because I think we should pay people more or less because we should pay them less.”
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Rather, you should say, “Given our business strategy, here is what our pay strategy should be and here’s how we should adjust pay.”
PayScale went out and did interviews with our customers. We heard a lot about the challenges HR professionals are facing.One customer said to me, “Look, Dave, I think know what we need to do but I cannot convince the CEO that we actually need to do.” That’s where the rubber hits the road.
Somehow, her idea was not getting across. And, usually, the reason an idea doesn’t get across is because the CEO is saying, “I get it that you’re asking for more, but what do I get for that? How does this matter to the prospects of the company? Why should we pay more exactly now? Does it mean that our best workers will hang around longer and we can always be prepared to get big projects?” That’s a reasonable thing from a planning perspective versus saying, “I have employees coming to my door and asking for more so I need to pay more.” That is a very reactive approach.
I think that have a reason and telling the “why” is the way to talk to executives, relative to comp.
Consider this conversation, If, for example, you’re a 100-person company and your average pay is $60,000 per year, that’s $6,000,000 a year. “Shouldn’t we try and optimize that?” is a good question.
Optimize does not mean drop that number. It means asking, “How do I get a good return for it and make sure that it gets done in a sustainable way? I want to ensure that we don’t have to go through these gyrations of hiring and laying off, people coming in and complaining and all the other stuff that goes with it.”
Many companies would put more effort into buying a piece of equipment than they do spending sixty grand on a human being. It shouldn’t be that way. They should be making smarter decisions about their business strategy and who they should be hiring and who they are competing against and the markets they are competing against and asking, “Should we continue to do that or not do that?”
For example, we have customers in many industries, but we especially have a lot of manufacturing companies as customers because most traditional survey providers do not focus on them because usually they are smaller, usually they don’t have a lot of dough to spend, and almost always, historically, there is a union element so pay is what it is. But, there are many, many smaller companies that are not union shops.
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What will usually happen is that an HR generalist at a manufacturing company will show up on the phone with us and say, “I’ve had a couple of people leave because they say that want 50 cents more an hour.” And they’ll want to know, “Am I paying too little? Should I increase pay 50 cents?”
Remember, to this company it’s not just 50 cents. It’s 50 cents times how many people they have doing that job and it gets to be a pretty big difference. Let’s say that’s a $40,000 overall investment this year and the questions is, “Is that going to pay off?” And, the answer almost always is, “I have no idea. I think that is not the good question.”
Let’s think about fifty cents an hour relative to an employee. That’s a thousand dollars a year, it’s 80 bucks a month, it’s 50 bucks after taxes. Do you honestly think that someone is leaving to go down the street for 50 dollars more a month? Probably not.
They are leaving because they don’t feel valued by the company. And, they don’t see what their prospects are if they stick around the company.
What if you had a scenario where you said, “Actually, I’m going to pay my incoming people even less because I’m going to over-invest in training them and they will know when they get through that first year or year and a half that their pay will go from 10 bucks and hour to 14 bucks an hour.”
In that environment, wouldn’t people stick around a little bit more? Wouldn’t that be a self-propelling thing where you are going to hire people who are willing to go through this apprenticeship-type model because they know that if they make it through that their pay goes up substantially, not just 50 cents more an hour.
And, the only way you can do that is to have to have a set pay structure and a strategy that goes with it that suits your business. That model says that, with the people that you’re hiring, what matters is your training them to get a skill. It doesn’t matter that they don’t have some already acquired skill. If your model requires an already existing skill then, you probably cannot incentivize in this way.
That’s a smart way to deal with competitive pay versus discussions around, “Should I increase pay 50 cents an hour?” which is a ridiculous question in my opinion.
Q: Is there a special leadership role for HR in the coming years?
A: Yes. Things have been shifting more and more towards pay for performance and I think that’s going to speed up more. What does that actually mean? There is a lot of literature out there promoting pay for performance but it’s not a panacea. And, done in the wrong way, it’s actually worse that not doing it at all.
Pay for performance requires that the people who are deciding what performance means actually know what they are asking for, and have a way to measure it and it really does matter. As opposed to pay for performance based upon some subjective opinion like, “Hey, I think you are a good employee so now you are going to get more.”
There has to be on some measurable type output that actually matters to the company. And it is almost not debatable that it happened. You’ve either hit this thing or you haven’t, or there are varying degrees with tiered payouts.
I think that HR professionals who are able to pull off developing measureable goals will probably matter more to their company from an HR perspective than the people who don’t know how to do that.
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