Defining Value

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.

Importance of Job Worth

Most of us equate at least a portion of our personal value or identify to our job.  Two of the main reasons for the lack of autonomy between the spheres relates to the percentage of our lives we spending working and the ever decreasing line between the workplace and home.  As a result, when we combine the psychological with the actual requirements, most employees feel undervalued for the work they perform.  Imagine how unlikely it would be to ask a group of your employees what they feel about their current pay and the response would be they are all overpaid.

As the labor market continues to recover slowing, more organizations want to know “what is this job worth?” Although the question seems straightforward at first, approaches vary and “devil is in the details.”  Some of the most common approaches include:

  • Gut valuing
  • Organizational value
  • Performance level
  • Evaluation

Gut valuing encompasses using our intuition to make a quick decision regarding a person, situation, or event.  Past experience and contextual analysis play into the decision, but little detailed or formal analysis occurs.  A typical example is when a supervisor starts a discussion of individual compensation by saying, “I really think this person is worth x amount and not a penny more.”

A slightly better approach considers a person’s value to the organization as a whole. This method of compensation evaluation formally or informally ranks an employee by how easy it would be for the organization to continue to operate at its current level without the person.

A more refined version of the organizational value method considers the actual performance level of the individual employee.  Either by formal evaluations or perceived personal contribution, employee compensation arises from who is a hard worker and who is not.  Although performance should make up an important portion of the compensation calculation, many organizations utilize too much subjectivity in their determinations.

Each of these approaches set compensation more on a case-by-case basis.  As a result, little empirical or comparable data comes into play in setting pay levels.  Although this might not be significant in an organization with a single employee, as the number of employees grow, it becomes a serious concern due to fairness and equity requirements.

Evaluation involves assessing jobs to determine relative worth.  Regardless if an organization adopts a formal or informal approach to determining value, two dimensions come into play: internal and external.  The internal dimension pertains to how comparable a job is to similar jobs within the same organization, while the external dimension encompasses the relative value of the position’s pay compared to other local or regional employers.  Once establishing the comparable value, most organizations determine the most appropriate placement.

As any organization looks at compensation, it is imperative that some form internal and external evaluation occur.  Only through a more comprehensive analysis can an organization determine how fair and equitable it is, but what it can do to attract and retain the type of employees it desires.

Compensation Dilemmas

As the economy starts to improve, more organizations are turning their attention to considering the best course of action for improving compensation competitiveness once resources become available.  Not all organizations have resources available right now, but the number anticipating taking some action is increasing.  A variety of recent surveys indicates that between 40 and 60 percent of organizations will take some type of compensation action this year.  Although this is exciting since it will relieve some of the uncertainty and need in most workplaces, it is only part of the picture.  Once identifying resources, the next big challenge is determining how best to allocate the limited funds.  Although this might seem like a good problem to have, it does present some interesting as well as controversial decisions.

Most employee surveys reveal that the average worker desires that their reward account for remaining with their employer, taking on the work of others as downsizing occurred, and dealing with the general stress of their business attempting to survive in such trying times. When employees comment on their expectations, the central theme relates to “being paid back” for their investment as well as some form of compensation for “weathering the storm.”

The intersection of employee expectations, available resources, and employer judgment poses two key questions related to the next step:

Should a broad, all-inclusive strategy of allocation be employed or a more targeted approach?

Most organizations have to decide between a small “across the board” increase for all employees or consolidating scare funds into a finite number of strategic compensation actions.  For an organization with a relatively stable market differential across the organization, an all-inclusive approach makes sense if resources are available.  However, when there are market differentials by classification, job family, or location, it may not be the most advantageous approach when competition is a concern.  As the economy continues to recover, these competitive fault lines move due to market forces and key staff may leave for better opportunities.  Consequently, overall relative market position of the organization, market position of specific classifications, and demand of the priorities should all be factored into deciding on the best approach.

Should we try to make up for the last four years when resources were not given to employees or start from today forward?

Given the slowness of the recovery, most organizations will be unable and unwilling to allocate sufficient resources to “make an employee whole” in the next few years.  If we extrapolate the pre-2008 trend until today, most organizations would need to increase current pay between 15 and 25 percent to “catch up.”  Not only is the cost unrealistic, the benefit from the investment would be short lived since most employees would view the action similar to a debt repaid instead of a recognition of sound performance.  Since the market as a whole remained flat over the last four years, most employees kept their pre-2008 relative position.  Specifically, if I was five percent below the market in 2008, I should be approximately five percent below the market now.  However, short of making up for lost increases and providing a reward, employees may not recognize initial compensation increases as worthy of the personal and professional challenges of the last four years.  A middle position adopted by some organizations mixes a partial increase to address the past coupled with a small annual increase for the current year.

What should you do? It depends on where your organization was before the downturn, what resources you have now, status of your current market, and where you want to go in the future.

Where is the Money?

With the economy showing some signs of coming back, more employees are starting to hope that their patience and diligence from the last few years will be rewarded.  In many organizations, we are entering year four or five without any type of sizable increase.  As we have discussed before, the lack of raises has created a rather strong demand that employees anticipate being met.  In other words, employees are waiting to be rewarding for “sticking with” their employer through a crisis that many associate with big business.

The good news is that more compensation money seems to be on the way.

A recent survey by Glassdoor.com found for the first time since 2008 that there were more raise optimists than pessimists or more people believe there will be raises than believe otherwise.  Among the 2,000 workers included in their Employment Confidence Survey, 43 percent expected a raise in the next 12 months.  Moreover, 46 percent expected their company outlook to improve in the next 12 months for a six point increase over three months ago.

The interesting news is that pay practice may have changed for now.

Aon Hewitt most recent compensation survey of 1,500 companies found that employers plan to increase pay on average 2.9 percent in 2012.  The increase to almost three percent is a definite improvement over the low point of 1.4 percent in 2009, yet still below the high flying days before the economic downturn.  One reason why this number may seem better than it really is relates to how this pay is provided.  Most companies when they have wanted to reward stars during the downturn have utilized more flexible pay strategies, such as bonuses or uniform allotments.  The Aon Hewitt study found that 90 percent of surveyed companies have been providing one time bonuses to various employees.

Similarly, a recent HCS survey confirmed that more than 60 percent of respondents are not going back to previous compensation practices, but moving to more strategic approaches.  The emphasis of decision makers is on improving future performance and increasing the quality of applicants.   There is less concern for rewarding those that remained with the organization during the downturn or even those who increased productivity to do more with less as workforces were reduced.  Put simply, there are numerous organizations that feel that keeping a job is payment or reward enough.

What do these changes mean when money starts to become available again?

  • Organizations are going to be more careful and use flexible pay options.
  • Human resource leader need to examine the short and long term consequences of this change related to recruitment, engagement, and retention.
  • Employees will need to receive large enough increases to offset their disappointment of not “being made whole.”
  • Differentiation will be more important as organizations focus on performance more than equity over the next few years and tools and procedures need to be robust enough to endure the extra employee scrutiny.