11 important takeaways from this video:
00:00:32 Equity is extremely important when detemining compensation. Distributive equity is compensation relative to others. Procedural equity addresse whether procedures and policies lead to faire compensation and results.
Person ‘A’ below gives very little and gets a lot in return for working for the company, while person ‘B’ below gives a lot to the company, yet receives very little in return. People are not dumb, and they can see what they are making relative to their colleagues and relative to to other people in their industry.
00:05:30 If I am a small- to mid-sized company with 100 employees and a salary budget of 5M€, a very simple compensation system would be simply to divide 5M€ by 100 = an annual salary of 50,000€/year for everyone in the company. But Responsibility within the organization? Performance among peers? Qualifications & credentials? Tenure at company? If I want to attract the best candidates, how can companies determine their salary budget when simple isn’t always fair.
[EDITOR’S NOTE: Refer to Armin Trost’s lecture on Attracting & Selecting The Best Candidates for more on this.]
00:16:00 Total reward is how you balance the different components (above) to create a ‘fair and balanced’ salary budget for your company; the sum of all the financial and non-financial rewards employees get in order to acknowledge their work and contribution to the company:
00:20:00 To develop your base pay structure, begin by conducting a job analysis – a combination of the key responsibilit(ies), where this job position lies relative to the other job positions in the company, and how much other companies pay for similar job positions within the market.
Where:
- Job grades 1-8 is your position on the company’s corporate ladder
- Pay rate is how much that person is paid
- The market is the average pay rate for the industry
- The gray area is the minimum-maximum zone of possible agreement (ZOPA)
(Above photo by Calebsam)
Doing this simultaneously creates a transparent, fair and balanced salary pay scale your company can now use to justify it’s job offers while giving the potential candidate room to negotiate his or her pay based on his or her unique educaiton and work experience.
While performing your company’s base pay structure is a simple math-based calculation, actually implementing said pay structure is rife with potentially emotionally and politically-charged dilemmas, as this has immediate effects on people’s lives and their resulting motivation to do their job. It is therefore crucial to allow for flexibility in the process and to identify and reward employees who are required to do more than their ‘job classification’ says they do.
[EDITOR’S NOTE: For unorthodox advice on techniques to move up quickly in the corporate world, read The Rules of Work by Richard Templar]
In the above chart, employee ‘A’ isn’t earning enough relative to his or her job position relative to the market line, meaning that you risk losing this person to a competitor. Therefore a salary increase for this employee would be in order if you want to keep this employee.
In the above chart, employee ‘B’ is earning more than the market level, and therefore the company may either:
- do nothing and find other ways to balance your pay structure
- give this person more responsibility to match his or her pay
- let the person go and hire another person at a lower salary
- reduce the person’s salary to fit your pay structure
00:59:10 With regards to compensation and determining base pay, the median is the salary where 50% of the population earn less than the median, and 50% of the population earn more. Knowing the median is important because with the average, one single person in the highest- or lowest-echelon of the payscale can significantly raise or lower the total average, whereas with the median this number isn’t as affected.
01:03:28 One-time performance bonuses are very effective because they can be given to employees directly related to the reason why they are receiving the bonus in a timely manner, and thus can keep the employee motivated at a time when you need them the most.
01:03:51 Piece-rate system performance awards with additional pay all performance which is over and above the fixed performance requiremants for a job.
01:06:44 A target bonus system is where the employee and employer agree on a certain bonus based on a pre-defined target achievement: Meet this objective by this time and you will receive this bonus.
01:13:55 It’s understood that the more I pay, the more I expect, but you can’t always only motivate people through rewards, pay and bonuses.
01:20:40 If you have a simple task where you aren’t required to think, such as working with your hands in exchange for a reward, you work faster when you receive a reward. If you have a task that requires you to think, be creative and solve a complex problem, then a reward actually damages motivation. Rewards only work if you don’t need to think.
01:24:20 There are two different types of motivation:
- intrinsic – doing something because you loving doing it (internal forces)
- extrinsic – doing something you wouldn’t normally do because you are paid or obliged to do it (external forces)
[EDITOR’S NOTE: For more case studies and interesting findings on this topic, read the book Redirect by Timothy Wilson.]