Total Compensation: Making It Clear to Leaders

As part of our discussion of compensation philosophy over the last week, a reader asked how to best work with Board members or executives on understanding total compensation.  I thought I might use this post to address her concern from a practical standpoint.

Most organizations have some high level group that has to approve any effort to implement or standardize compensation practices.   In some cases, a group may even vote on each compensation action before it is implemented.  In my experience, there are three challenging points of view among those at the executive or Board level:

  • I need to understand all this better
  • These people have it great and should be happy
  • I know better than HR

I need to understand all this better

There are some leaders that sincerely do not understand compensation well and want to know more about how compensation works to improve his or her ability to make the required decisions in an informed and fair manner.  Moreover, a leader in this position is usually aware of media discussion on various facets of compensation like rising benefits costs, increasing differences between executives and employees, and improving the competitiveness of the organization through a progressive compensation structure.  However, the leader may be confused about these reports and need time to better understand the organization’s system in relation to the media discussion.  Typically, this type of leader is best approached by providing a basic overview of compensation basics before requesting action.

These people have it great and should be happy

One of the most common groups of leaders is the person that always feels that the employee have it too good.  I worked a few years ago with an organization that most of the Board members had been small business owners at one time before becoming successful and being selected to serve on the this large organization’s Board.  One member constantly compared the pay practices of this large organization that employed thousands of specialized workers to her husband’s small, lawn care business.  Most of her comments began with “if these people worked for us, we would never do anything like…”  She filtered all compensation decisions through her own frame of reference and it had a major impact on the organization.   This is one of the most common points of view of those that feel that employees have it too good.  Another common point of view is to assume that rising costs are present in your organization only and not indicative of the market as a whole.   These leaders feel taken advantage of and want to “fix” the perceived differential.  The last misperception is that people should work for what the leader feels is right based on his or her own perception and not what the market would bear for the specific job or occupation.  Each of these leader types creates a challenge to a human resource professional since a change in point of view is necessary before education regarding compensation can occur.  The best approach is to account for the value and contribution made by employees following by the cost of losing talent or diminishing internal capabilities.

I know better than HR

There is a subset of leaders that feel that compensation is just not that complicated and wants to come up with the best solution.  This group is challenging because many times the perception is that the leader knows everything that he or she needs to know about compensation.  Typically, these leaders want to set pay based on personalities or personal knowledge of the employee and care little for internal equity, legal requirements, or long term ramifications of compensation decisions.  The best way to address these leaders is by showing how the parts fit together and engaging in more of a working session.  Since they feel they have answers, making them part of the process can be very beneficial.

So, what tools does a human resource professional need to have in his or her tool box to be successful?  The three big tools include:

  • Summary of the operations, capabilities, and outcomes of the organization
  • Overview of compensation basics
  • Summary of issues that arise when best practices are no utilized and the tangible and intangible costs

It is not sufficient to have only one since an executive team or Board may be made up of leaders that fall in each of the aforementioned groups and require different approaches.

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