Most of us have dealt with the compensation and classification system in our organization in one capacity or another. As managers, we use the system when we hire, promote, and evaluate while as human resource professionals the system provides the backbone for organizing work and defining the value work within our organization. Although the system serves many purposes, most managers and employees alike focus on how it sets value. As human beings, we have the tendency of equating our personal value with our income or pay. We view pay as a synopsis of our value to society as well as ourselves. As a result, compensation supersedes simply providing for our material needs and relates to who we are.
Most organizations recognize this perception, yet focus on creating and maintaining a system that ensures equity and management satisfaction. As a result, every organization possesses some balance between fairness or equity and making managers happy from a staff and resource allocation standpoint. Although we could discuss the management happiness element at length, I want to address the fairness component in this post. Most of us talk about internal and external equity on a regular basis, but stop short of describing what we believe forms or determines equity. Put another way, we have mixed views of how we should establish value and concentrate on equity in the general sense.
Every organization possesses some hypothetical balance between the three most common factors that create value: experience, skills, or results.
Experience formed the basis of the traditional way of thinking about value. The base assumption being that as an employee worked in a job longer, he or she became more productive and more valuable. Utilizing the craft model, an employee started as an apprentice and finished his or her career as a master with transition occurring due to more time on the job. This made sense in a pre-industrial and industrial world, but diminished in value as we entered the post-industrial period.
More recently, value has shifted to skills and away from experience. This change related to the acceptance of a threshold point where an employee becomes most valuable when reaching full competence with the skills relevant to the job and stays at that level over time. Although the time necessary to reach full competency varies by job and industry, most agree that somewhere between three and seven years captures the attainment of full competence. Unless an employee is an exceptional performer, this point would represent full market value for the job and the incumbent.
Today, results or outcomes determine value. In most organizations, individual value shifted from how long someone worked at a job to reaching full competence to being able to complete assigned work in an efficient and effective manner. Consequently, each employee’s value should relate to what he or she contributes to the organization.
Almost all organizations possess some combination of the three factors in their compensation and classification system, if not practices. The important questions to answer include:
- How do you want to define value?
- How will it will it support your strategic direction?
- What type of employees will your mix attract?
These answers should form an important component of your compensation philosophy.