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Image Credit: <idiva.com

Image Credit: <idiva.com>

Jim Brennan over at the Compensation Cafe recently recently did some compensation evangelizing about a topic I have strong convictions around:

The importance of paying people fairly (notice I said fairly and not competitively).

You can read the full article 1. …and you should. It’s very good.in the link above 1, but in short Brennan’s key points are:

1. Many companies have a compensation philosophy of not granting an employee more than a 10%-15% raise even if he or she lags the market much more than that. Conversely, the same companies have no problem paying an unproven external candidate fair market value on the 2. This is a deeply flawed approach to compensation because – as I’ve pointed out before – a company’s pay philosophy (specifically at what percentile of the market they target for a given job’s midpoint) has a significant impact on salary. This difference in pay is often not correlated with the relative performance of two employees at separate companies.basis of their prior salary. 2

2. Employers sometimes have a tendency to disqualify otherwise qualified candidates for jobs on the basis of prior salary (ex. the thinking here being that if someone makes 65k there is no way they’re qualified to do a job with a midpoint of 120k).

3. The above flaws in thinking are a product of our tendency as human being to bias our decisions by using relative relationships as a benchmark rather than objectively looking at the capability of an employee to perform work.

…I agree with all of Brennan’s points, but *not* because I have some deeply felt need to see everyone paid a salary commensurate with the value they bring to the table. In truth, most people are underpaid relative to the value 3. If employers paid employees a wage based on the value they brought to their companies it would be a break even proposition for them, yes?they add to their respective organizations. 3

Instead, setting aside the question of the “right” thing to do from the standpoint of pay equity, government legislation around pay, and even simple compensation best practice around valuating work, I’m mostly concerned with paying people fairly for two simple reasons:

Retention and employee engagement.

Organizations cannot put compensation data here anymore. Employees know... Image Credit: <blogs.screenconnect.com

Organizations cannot put compensation data here anymore. Employees know… Image Credit: <blogs.screenconnect.com>

To the above points, let me tell you something that you may or may not know: People know when they are underpaid. They don’t need access to subscription services like ERI and Paynet to learn this. With websites like Glassdoor.com, Payscale.com, and Salary.com it has never been easier to find out how one is paid relative to the market.

This is important because as much as there is an old saying that “people leave managers not companies“, the truth is that when an employee makes a decision to leave his or her organization it often starts with money.

While it’s true that an employee seldom leaves his or her company specifically because of salary, when someone knows they are underpaid it magnifies all of the other problems at work. I know many people who have left their organizations that started out complaining about their salaries, then their bosses, then the culture, then the hours, and then finally they left.

Finally – and I’ll close with this – even if an underpaid employee doesn’t quit (and sometimes – for various reasons – they can’t), they often mentally check out.

If a company doesn’t pay for performance it often doesn’t get performance.

So if you’re an employer reading this; pay people based on the value they bring to your organization, *not* just what you can get away with paying them.

It actually might turn out to be better for your bottom line.

As always, please share your thoughts in the comments section below.

Best,

Rory

If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

SomethingDifferentHR@gmail.com OR rorytrotter86@gmail.com

@RoryCTrotterJr

http://www.linkedin.com/in/roryctrotterjr

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