Fair Pay

http://knowledge.wharton.upenn.edu/article.cfm?articleid=3262#.UaIrILV8JrM.email

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"Before you become a leader, success is about growing yourself. When you become a leader, success is all about growing others." (Jack Welch)

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K@W has put out an article this month that addresses the issue of pay equity. There aren't many people who know what they're doing on this issue.

Doing it right involves relative ranking of jobs inside a company and those relationships can be different in different companies.

It all starts with competitive pay data. If you can get salary survey data for your industry or function, then you can reduce it to trend lines by job or job area. Place your salary data up against the industry quartiles and see where you rank. If your overall pay trend line is "average," then expect "average" performance. If you want to be a "third quartile" performer (Top 25%) for your industry, you better pay like it. Third quartile pay is the norm for top companies in the Fortune 500.

Once you get base pay to third quartile, then what happens when bonuses kick in? Usually, management bonus plans kick in for the top 100 or top 200 executives. That's a separate "total cash" trend line. Most companies that are third quartile in base salaries want to be there with their bonus trend lines as well. Here, specific goals that relate to incentive payouts are critical.

Believe it or not, what's important here in any company, is what the employees think of the pay system. If they feel that the relative ranking of jobs internally in a company reflects both the "market" and how "their company" values a job versus other jobs inside their company, then things move along smoothly. This is hard to get to. You have to have excellent competitive pay data and you have to have an excellent job evaluation system that reflects how the line management views the "value" of jobs in a company. For example, GM may pay its sales people less in base and bonus than Ford does because GM places less value internally on their sales force. GM may spend more on advertising than Ford does. You have to know what you're doing and your employees have to feel that you do.

The 204 multiple (CEO pay versus the average pay of a worker) referred to in the Wharton article helps to define the issue of "fair pay" but CEOs tend to be outliers in many cases anyway because they are turning around companies or keeping companies at the top of whatever industries they're in. Under the heading of "how much would you have to pay me to jump off a cliff..." what would our pay gurus think it took to get Ron Johnson to leave his former company to join a sinking ship in a different industry? In situations like that, the termination pay (if you can't get the job done, or the job is impossible) is in the contract.

Smart companies watch turnover rates at every level. They might adjust pay levels for certain jobs or departments if they thought they needed to. That's management.

The "Apple" example referred to in this article implies that the company has all the money in the world to pay their college graduates more (than $12 to $14 an hour) to work in their retail stores. Actually, Apple does have almost all the cash in the world but why would they pay more money than what's "competitive" for retail store employees. They're not stupid.

The better you communicate pay systems to employees, the more the "procedural fairness," as John Paul MacDuffie explains in the article. In many cases, it's not the pay that's unfair, it's the communication that's lousy.