Compensation management practices most widely used among the mid-sized and large companies of Mexico have been imported by subsidiaries of major multinational firms and adopted by Mexican organizations, on the assumption that these constitute best business practices.
However, in most of these organizations (and probably in most major multinationals), these practices are an irritant to the workplace environment and an obstacle to retaining talent and improving performance, rather than an element that supports the firm’s business culture.
In our experience, executives at the vast majority of these organizations are unsatisfied with the strategies for talent management and compensation because, as they often explain it, they do not help to identify or compensate top-performing employees, nor do they help to improve the results of the business.
Most of the employees of these companies are unsatisfied as well. They complain basically about the slow pace at which their salaries grow, about the lack of internal equity, about “how little” they earn compared to colleagues who “do the same thing” in other companies and, in general, about the obscure and illogical rules of the game that seem to underlie decisions affecting their pay. Of course, there will be those who believe this is merely a widespread perception that is fueled by emotional argumentation, and that the problem can be resolved with more information and better communication.
There is little doubt that sharing relevant information can greatly improve peoples’ perception of any issue, but in this particular case, perceptions are grounded in problems that are not only evident to the eyes of those who are affected, but are also painfully obvious to those who observe the phenomenon objectively. These people frequently face practices that really have nothing to do with business common sense.
To exemplify this, I will review some common practices relating to principles that support any healthy compensation management system: competitiveness and internal fairness.
Competitiveness is, by most definitions, the principle that states that talent should be compensated according to compensation market practices and pay levels.
I know very few companies th at do not claim to pay competitively. Although it is rare for them to specify what precise position they intend their compensation to have with relation to the market, or what their market reference is (which organizations they are considering), they at least explicitly state their intention to pay as “other companies” in the market pay (expressed those in generic terms). However, in practice, the way in which compensation is often managed keeps them from paying competitively.
To do this, we must first understand that talent has a market “price”, resulting of supply and demand for specific expertise. For example: while recent systems engineering graduates (without experience) are today paid between 14,000 and 17,000 pesos a month, those who have followed their careers and are considered experts are paid an approximate average of 25,000 pesos. The significant difference between both “prices” means that the more specialized and developed the talent, the higher its “price” (due mainly to less supply of it there is in the market).
But the law of supply and demand (is there anything more important in business common sense?) is ignored by many of these companies. The following is a frequent example: the typical organization hires a recent engineering graduate with a salary near the bottom of the salary range.
Once she is on board, the organization trains her before assigning her to the position she will occupy, and once she has assumed her duties, she is subject to an ongoing program of professional development that includes an induction program, the assignment of growing responsibilities, technical training, the development of leadership abilities and finally, a host of actions to develop this talent until she is ready to climb further up the organizational ladder.
Throughout this time, the employee’s salary is regularly increased (usually by between 3% and 5% a year) according to the annual budget… until one day, still earning a salary not far from the bottom of the range, the engineer appears before the Human Resources Department and resigns to join another company that is offering her a salary 25% to 30% better than what she is currently making.
The initial reaction of those who feel abandoned by the talent they put so much work into developing is to accuse the other company of “pirating” their employees. They fail to realize that they set themselves up for the loss with two simultaneous and contradictory actions: developing the talent of the employee, and ignoring the increase in the market “price” resulting from such development. This is diametrically opposed to basic business common sense.
Furthermore, most companies also claim that they have a policy of paying for performance. But they actually fall well short of applying this policy in reality, as can be attested to in the vast majority of organizations, where we frequently find that the best employees do not, in fact, earn more than other.
The reason for this discrepancy lies primarily (but not exclusively) in the practice of linking a salary increase percentages with performance ratings. Thus, the “decision” to raise the salary of each employee is based on a matrix that correlates a very narrow range of percentages with performance ratings (and in some cases, with position of the salary within pay range). I have put “decision” in quotes because this is actually such an automatic and rigid process that does not admit but very minor adjustments, limiting managers’ ability to apply their own discretion.
There are many problems with this approach, so I will just mention the two most important: 1) the system focuses on managing increase percentages, rather than managing salaries; in other words, the focus is on the means (percentages) while forgetting about the ends (salaries in pesos and cents); and 2) the increase matrixes state pay raises for its best employees just a little higher than the ones stated for other employees.
This means that even an outstanding employee must wait 10, 15 or more years to reach the maximum of their pay range (which is the natural target for someone with such a performance) while during those same 10 or 15 years, average performance employees may earn more if, for any circumstantial reason, began their career with a salary above the midpoint of that same range.
The obvious questions for any observer are: how can a company claim to pay for performance if their practices prevent the best employees from really earning more than the others? And, what business logics could there be behind a practice that allocates more money to paying the least valuable talent in the organization? Or differently put, how much time should a truly outstanding employee wait to be paid what his talent is worth, before deciding to leave the company?
In defense to statu quo, it is often argued that this problem is a result of the limited availability of resources for the annual salary plan. It is true that most companies have limited resources to increase salaries each year, but this is not the central problem. The real problem is that companies manage salaries based on two erroneous premises: 1) a very narrow range of increase percentages; and 2) every employee must have a pay raise every year.
Effective pay for performance implies resources rationalization based on totally different premises: 1) maximum differentiation, which should allow for double-digit salary increases for the best; and 2) employees already paid above their pay target should not have a salary increase (as they are paid more than what their talent is worth). The second premise will leave money to fund the first premise.
In conclusion, salary management practices should be reviewed following a process focused on employee talent. Maintaining a healthy competitive position means not only paying salaries that are appropriate at the time the employee is hired, but recognizing that talent of each employee evolves and their salaries must keep pace with this evolution.
Paying for performance also requires a different strategy than what we have described. One that is based on pay goals associated with talent levels, prioritizing salary levels instead of increase percentages, allowing for high salary increases for those who are the organization’s best talent, and funding those high salary increases with the savings that come from employees already compensated at above their pay goals.
It is time to begin managing employee compensation with business common sense. Talent has a market price, and paying it in the short, medium and long terms, is far more profitable than continuing to manage a very narrow range of increase percentages.?
References
Cascio, Wayne y Boudreau, John (2008),Investing in People, FT Press-Pearson Education, Inc.
Chambers, E., Foulon, M., Handfield-Jones, H., Hankin, S., Michaels, E., (1988),The War for Talent, The McKinsey Quarterly, Número 3, McKinsey, páginas 44 a 57.
Martocchio, Joseph, (2008), Strategic Compensation. A Human Resource Management Approach, Prentice Hall.
Lawler, Edward E. III (1990)Strategic Pay, Jossey-Bass
Mendoza, Francisco (2012),Remunerar estratégicamente… es más rentable que simplemente pagar, Guverni
Talent and Compensation Strategy
Compensation management practices most widely used among the mid-sized and large companies of Mexico have been imported by subsidiaries of major multinational firms and adopted by Mexican organizations, on the assumption that these constitute best business practices.
However, in most of these organizations (and probably in most major multinationals), these practices are an irritant to the workplace environment and an obstacle to retaining talent and improving performance, rather than an element that supports the firm’s business culture.
In our experience, executives at the vast majority of these organizations are unsatisfied with the strategies for talent management and compensation because, as they often explain it, they do not help to identify or compensate top-performing employees, nor do they help to improve the results of the business.
Most of the employees of these companies are unsatisfied as well. They complain basically about the slow pace at which their salaries grow, about the lack of internal equity, about “how little” they earn compared to colleagues who “do the same thing” in other companies and, in general, about the obscure and illogical rules of the game that seem to underlie decisions affecting their pay. Of course, there will be those who believe this is merely a widespread perception that is fueled by emotional argumentation, and that the problem can be resolved with more information and better communication.
There is little doubt that sharing relevant information can greatly improve peoples’ perception of any issue, but in this particular case, perceptions are grounded in problems that are not only evident to the eyes of those who are affected, but are also painfully obvious to those who observe the phenomenon objectively. These people frequently face practices that really have nothing to do with business common sense.
To exemplify this, I will review some common practices relating to principles that support any healthy compensation management system: competitiveness and internal fairness.
Competitiveness is, by most definitions, the principle that states that talent should be compensated according to compensation market practices and pay levels.
I know very few companies th at do not claim to pay competitively. Although it is rare for them to specify what precise position they intend their compensation to have with relation to the market, or what their market reference is (which organizations they are considering), they at least explicitly state their intention to pay as “other companies” in the market pay (expressed those in generic terms). However, in practice, the way in which compensation is often managed keeps them from paying competitively.
To do this, we must first understand that talent has a market “price”, resulting of supply and demand for specific expertise. For example: while recent systems engineering graduates (without experience) are today paid between 14,000 and 17,000 pesos a month, those who have followed their careers and are considered experts are paid an approximate average of 25,000 pesos. The significant difference between both “prices” means that the more specialized and developed the talent, the higher its “price” (due mainly to less supply of it there is in the market).
But the law of supply and demand (is there anything more important in business common sense?) is ignored by many of these companies. The following is a frequent example: the typical organization hires a recent engineering graduate with a salary near the bottom of the salary range.
Once she is on board, the organization trains her before assigning her to the position she will occupy, and once she has assumed her duties, she is subject to an ongoing program of professional development that includes an induction program, the assignment of growing responsibilities, technical training, the development of leadership abilities and finally, a host of actions to develop this talent until she is ready to climb further up the organizational ladder.
Throughout this time, the employee’s salary is regularly increased (usually by between 3% and 5% a year) according to the annual budget… until one day, still earning a salary not far from the bottom of the range, the engineer appears before the Human Resources Department and resigns to join another company that is offering her a salary 25% to 30% better than what she is currently making.
The initial reaction of those who feel abandoned by the talent they put so much work into developing is to accuse the other company of “pirating” their employees. They fail to realize that they set themselves up for the loss with two simultaneous and contradictory actions: developing the talent of the employee, and ignoring the increase in the market “price” resulting from such development. This is diametrically opposed to basic business common sense.
Furthermore, most companies also claim that they have a policy of paying for performance. But they actually fall well short of applying this policy in reality, as can be attested to in the vast majority of organizations, where we frequently find that the best employees do not, in fact, earn more than other.
The reason for this discrepancy lies primarily (but not exclusively) in the practice of linking a salary increase percentages with performance ratings. Thus, the “decision” to raise the salary of each employee is based on a matrix that correlates a very narrow range of percentages with performance ratings (and in some cases, with position of the salary within pay range). I have put “decision” in quotes because this is actually such an automatic and rigid process that does not admit but very minor adjustments, limiting managers’ ability to apply their own discretion.
There are many problems with this approach, so I will just mention the two most important: 1) the system focuses on managing increase percentages, rather than managing salaries; in other words, the focus is on the means (percentages) while forgetting about the ends (salaries in pesos and cents); and 2) the increase matrixes state pay raises for its best employees just a little higher than the ones stated for other employees.
This means that even an outstanding employee must wait 10, 15 or more years to reach the maximum of their pay range (which is the natural target for someone with such a performance) while during those same 10 or 15 years, average performance employees may earn more if, for any circumstantial reason, began their career with a salary above the midpoint of that same range.
The obvious questions for any observer are: how can a company claim to pay for performance if their practices prevent the best employees from really earning more than the others? And, what business logics could there be behind a practice that allocates more money to paying the least valuable talent in the organization? Or differently put, how much time should a truly outstanding employee wait to be paid what his talent is worth, before deciding to leave the company?
In defense to statu quo, it is often argued that this problem is a result of the limited availability of resources for the annual salary plan. It is true that most companies have limited resources to increase salaries each year, but this is not the central problem. The real problem is that companies manage salaries based on two erroneous premises: 1) a very narrow range of increase percentages; and 2) every employee must have a pay raise every year.
Effective pay for performance implies resources rationalization based on totally different premises: 1) maximum differentiation, which should allow for double-digit salary increases for the best; and 2) employees already paid above their pay target should not have a salary increase (as they are paid more than what their talent is worth). The second premise will leave money to fund the first premise.
In conclusion, salary management practices should be reviewed following a process focused on employee talent. Maintaining a healthy competitive position means not only paying salaries that are appropriate at the time the employee is hired, but recognizing that talent of each employee evolves and their salaries must keep pace with this evolution.
Paying for performance also requires a different strategy than what we have described. One that is based on pay goals associated with talent levels, prioritizing salary levels instead of increase percentages, allowing for high salary increases for those who are the organization’s best talent, and funding those high salary increases with the savings that come from employees already compensated at above their pay goals.
It is time to begin managing employee compensation with business common sense. Talent has a market price, and paying it in the short, medium and long terms, is far more profitable than continuing to manage a very narrow range of increase percentages.?
References