Consistency vs. Customization in Compensation Structures – Pros and Cons

Today I want to talk about a common problem faced by businesses (and by extension1. I’m actually in the process of a move. I’m sitting on the floor writing this (the furniture is all gone) and it all has me feeling vaguely whimsical. Let’s see where this takes us.compensation functions): 1

When managing its compensation structure, how should an organization account for the fact that some functions add more value to the business than others?

This is a fundamentally different question than figuring out how to reward a contributor dramatically outperforming one’s peers in the same job (higher merit increases and pay adjustments will create separation over time). It’s also different than valuating a specific job particularly highly (if a skill set is hot then the market will set the rate as a product of supply and demand).

The question I’m posing is around the challenge of addressing the fact that in a hypothetical widget sales organization, the widget salespeople may materially2. This sort of problem is a common one in many organizations, but I like using widget analogies so let’s go with this tonight. generate more value for the business than the operations people (as an example – it could just as easily be the other way around in a product-focused company).

This doesn’t mean that the skill set the salespeople have is more valuable in the overall external market than are those of the operations people in the organization (they may or may not be), nor that the skill set is harder to learn/develop. In fact, let us instead assume in this analogy that the widget salespeople only have more value than their operations counterparts internally.

Should the sales people be paid more? Depending on if you believe in internal based pay models or market based pay models your answer may vary.

…But what if an individual contributor within a function generates more money for the business than his or her manager? Should that employee have a higher base salary? If his or her commissions causes a dramatic pay disparity between he/she and the manager, should said commissions be capped at a certain percentage?

A company could choose to leave the commissions uncapped, but it might then find it can’t attract individual contributors into the management ranks because the pay hit is too significant.

…Of course, this may not be a bad thing. There is an argument to be made that the historical tool used to reward top individual contributors (moving them into management) is a deeply flawed way of selecting managers (just because one is a good doer doesn’t mean he or she is a good manager). Even if this is the case, however, the fact remains that if managers make a fraction of the pay of the employees they’re managing and aren’t selected based on their performance as individual contributors there is a real danger that said managers lack the credibility with their reports to lead them.

I don’t know what makes the most sense here – as always, it mostly depends. The topic has been on my mind lately, however, and I wanted to share some quick thoughts with you tonight.


Categories: Talent Management