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Image Credit: <guavabox.com

Image Credit: <guavabox.com>

…So Human Workplace CEO Liz Ryan has a really good post up on Forbes espousing the merits of skill/person based pay.

1. This is a good post to read if you don’t know what either skills or job based pay structures are, as I’m not going to go over them here. Also, as a side (side) note that is vexingly my highest viewed post by a considerble margin.I’ve written about skill/person versus job based pay structures before 1, and my opinion hasn’t changed all that much since then: I am a fan of using skill based pay when compensating super high potential/performing talent. My reasoning for this is multi-faceted, but includes the fact that research shows top performers need out-sized compensation to stay with their organizations (unlike median performers, who will settle for being paid at or even below market); furthermore, salary compression isn’t going to be a long-term issue with top performers because they will promote out of their current pay grade sooner rather than later (finding their way back to the center over time as they eventually move into roles more in line with their abilities).

But Liz appears to be arguing the merits of using person-based pay in all situations, dismissing job based structures (and perhaps structures in general) as outmoded and incapable of capturing the value an employee brings to the table. With that said, I’m assuming for this post that she isn’t advocating paying for skills that aren’t relevant to a job (a cashier that knows Python or C# isn’t going to use those skills in a way that makes their company money), but is instead asking for a more holistic approach to assessing talent that ignores structure and valuates an employee based on their skills in the larger context of how they might add value to an organization.

Instead of getting into what that might look like (which could be its own book) let’s instead touch on the practicality of the concept:

As a self-described compensation guy (that finds great delight in bringing order and structure to things), I have a slight bias against the argument that not using pay structures will lead to better talent outcomes for organizations. 2. For the curious, my HR Mount Rushmore currently includes Josh Bersin, Tim Sackett, Ann Bares, and Suzanne Lucas. In there own way each of these people are brilliant HR folks, and I read pretty much everything they write. But Liz Ryan is quietly making her way onto my HR Mount Rushmore 2, so let’s explore this a bit:

Indirectly supporting Liz’s point of view, companies seem to intuitively recognize that some job’s efficacy can be dramatically impacted by the person in the role. On average 85% of executive’s pay is at risk; or if you prefer a more “normal” job example, many organizations uncap the commissions of their sales forces and commodities traders (the latter of which can earn a percentage of their books at some firms). The job descriptions in these cases don’t materially change regardless of who is in the roles, but depending on the talents and skills of the incumbents the outcomes can be quite different. To be sure, in these roles the jobs themselves aren’t anymore likely to be person/skill based than roles with less variable pay… but the compensation outcomes for incumbents are designed to be aligned with performance in a way that allows organizations to truly recognize exceptional results.

Image Credit: <www.executiveboard.com

Image Credit: <www.executiveboard.com>

…And yet these examples may be exceptions rather than rules for a reason. The wrong CEO can leave a company crippled, and in many sales/trading roles the employees job efficacy can be distilled down to amount of revenue generated for the business. The value add of these sorts of roles is often both very quantifiable and highly variable. Conversely, measuring the value of most other jobs is much harder. For example, what is the difference between an average HR Manager or Financial Analyst versus a world class one? Measuring the business impact of these sorts of roles is difficult even if it is often recognizable. By this I mean that for most jobs we can readily identify the difference between a very good employee and a very bad one, but we typically have greater difficulty assigning a value that quantifies the difference between such performances as it concerns bottom line impact.

Ultimately, I think Liz has a point. Job based comp structures probably aren’t capturing the value that a certain segment of the population (mostly top talent on the high end) brings to the roles they occupy… and more importantly they don’t allow us to step back and properly assess the value each person brings to the table as a human being. Instead, we’re restricted to distilling their value to a pre-defined value that the work they’re being hired for has historically added (to the organization or in the market-at-large, depending on pay philosophy).

…But again, in most cases companies can’t readily quantify that value (and even if they could the market may or may not be baring it). Ergo, companies instead (mostly) pay talent based on a best-guess approximation of the value their jobs add to the bottom line, rewarding discretionary effort with a mind towards internal equity across the job population and larger enterprise rather than with a mind towards outliers. 

It’s not perfectly fair, but it’s fair enough (I think).

…Or maybe I have this wrong. A big part of my thinking on this topic is perhaps driven by the fact that job based structures are all that I’ve ever really known. So if I’m missing something here please let me know in the comments section below.

Best,

Rory

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