Human Resources: Some Myths about Pay

Compensation issues have been more than a passing interest in my work for over twenty years. While technology for managing pay and assessing the market has been automated and some basic assumptions have been updated through pay equity, fundamentals have remained pretty much the same. What surprises me is that there are still some assumptions about pay that are rarely questioned or revised in light of current thinking about human behavior. To my mind, these assumptions have the status of myth.

Myth #1: Our strategy is to use pay to attract and retain the best talent.

Of course, this strategy assumes that the "best talent" joins an organization because they are the best payers. As it turns out, we know that pay turns out not to be the key driver in recruiting the best and brightest. The now landmark War for Talent study by McKinsey demonstrated that several other factors are much stronger inducements for highly talented individuals to join and stay with an organization. These include:

The values and culture of the firm

Freedom and autonomy

Jobs with excitement and challenge and

Solid management

High total compensation is well down the list. Pay, truly differentiated for performance, is more important than overall pay itself.

The question is-why have as the central tenant of a pay strategy an objective that has so little traction with strong performers?

Myth#2: We will get the best by being Upper Quartile or Upper Decile Payers

This one is really a corollary of Myth 1. A potential problem occurs if a talent market becomes efficient and many organizations seek to offer Upper Quartile pay. Average pay will tend to rise as more and more firms shoot for Upper Quartile. If the talent pool remains relatively the same or is not growing fast enough to meet the demand, there may be too few "upper quartile people" to fill the jobs in every company that wants to be the upper quartile payer. We may be thankful that most labor markets are not that efficient.

Myth #3: We must get internal pay equity right or our people will be dissatisfied

Of course it is important to get internal equity right through job evaluation. However, the original and still crucial function of job evaluation is having a consistent mechanism for pricing jobs that are not readily found in the market such as designers of nuclear reactors. However, satisfaction over the outcome of job evaluation is rare. The process is not an exact science, but the methodical application of judgment. The best one can hope for is the general perception that the process is fair.

The perceptions of one´s own contribution and pay level in relation to one´s neighbor, others in the organization and externally may be skewed by personal bias. Truth is that it is extremely uncommon for an employee to say "I admit it. I am overpaid for what I do. Human Resources made me take this salary. It´s how my job evaluation came out." Because of this inherent self-interest, it has been my experience that job evaluation and pay systems are working optimally when everyone is equally dissatisfied with them.

However, there is a more serious issue. Borrowing an observation from Judith Bardwick´s Danger in the Comfort Zone, when employees become obsessed with their pay level, salary grade, job classification, etc, the organization may be submerged in an entitlement culture. The idea being, if the job is worth more and I am in it, I naturally must be worth more too. In an earning culture, employees want challenge, opportunity for growth, accountability and differentiated pay based on their contribution.

Myth #4: Pay is the best motivator

Alfie Kohn suggested that this might not be so in his book, Punished by Rewards several years ago and was called a communist by an executive pay consultant in a large U.S. consulting firm. I do not want to be tarred by that brush-communism is so yesterday. But the insight Kohn offered is that if rewards are the motivators of the behavior you expect from employees, you will likely not get permanent change. Take the reward away; the behavior goes away too. The performing seal in the circus does not play the tune if not rewarded with a piece of fish once and a while.

Permanent change and sustained motivation requires the mastery of change and having employees see purpose in what they are asked to accomplish. In other words, employees are motivated when they share the values and importance of the mission their company is on. In this sense, pay is mostly communication about value -- the value of their contribution for customers, shareholders and the employees themselves. Rewards reinforce these value propositions with employees and focus attention on results that matter. What better job could pay ever do?