What’s a Long Weekend Worth?

With Monday being Memorial Day, I –  like many others – had a three day weekend. Consequently, I had some time to catch up with old friends and family.

It was a much-needed hiatus, and it got me thinking…

What is a long weekend worth?

If you could have an extra two weeks of vacation would you give up 4-5% of your annual pay? What would you trade for five more floating holidays a year? Ten? How much money would you leave on the table for a one month sabbatical (on top of vacation) every few years?

As people get older / have families / become more financially secure / etc., time off generally grows in importance.

Despite this reality, however, time off is something that most organizations don’t quantify to their employee populations. These companies often up-sell time off as a perquisite in the interview process, but it’s relatively rare for a company to try to assign a dollar value to such a perk.

…This is mostly because the value of time off varies depending on1. I personally place very little value on vacation time. I’ll relax when I retire.who the person is that’s receiving it. 1 As such, most organizations don’t try to evaluate how much time off is worth to employees (and in the process, they’re probably leaving something on the table).

With that said, outside of just using a straight valuation of “time off = salary” (at either an hourly or weekly/semi-annual rate depending on exemption status) I can’t really think of a strong methodology for objectively valuating time off across an entire employee population.

Categories: General HR
Your Company’s Pay Philosophy May Impact Your Wages More Than Your Performance…

“High Pay” is based largely on frame of reference.

First things first: This is post number 100 1. As such, I want to thank everyone (anyone?) who has read every day since the beginning.

…With that said, today I want to write a post inspired by an interesting conversation a friend and I had late Tuesday evening. We were discussing what degrees / skills etc. have the most compensable value in the market, before eventually touching on something relatively fascinating:

In many instances a company’s compensation philosophy has a larger impact on salary than performance and skill-set(s) do.

Allow me to illustrate:

In the above bell curve graph (courtesy of salary.com), we see that the median salary for an HR Manager is roughly $88,186. No data set is perfect, but let’s assume for the purposes of this post that this is an accurate picture of the market for HRMs.

Now, let’s look at how drastically compensation philosophy can impact what the median employee in a population earns:

In this hypothetical we would get the following

We took our identified median (p50 of the U.S. national average for HR Managers), and divided it by half of the range spread. This is expressed formulaically as Min=Mid/(Spread/2). Put another way, we took $88,186 and divided it by 1.25. To get the maximum, we took the minimum and multiplied it by the range (in this case 1.5).

This is expressed formulaically as: Max=Min*Spread. We can check our math here by taking (Max-Min)/Min to get the range spread (it should be 50% in this case).

For our first example, let’s assume a hypothetical widget technology company wants to target the 50th percentile of the U.S. national average salary for the midpoint of their HR Manager pay grade. Let us further assume that the company intends for the median employee in the HR Manager population to fall at the midpoint of the job’s pay range. Finally, let us assume that the pay range spread (i.e. the distance between the bottom and top of the range) is 50%.

These are all reasonable assumptions, and in line with best practice for what a company might do with its compensation plan design.

No let’s look at what happens if we hold everything else the same, but target p75 of the market as our midpoint:

Now finally, let’s look at an HR Manager working at a company targeting p10 of the market as a midpoint:

WOW! The maximum of the p10 company’s range is lower than the minimum of the p75 company’s range! This means that the lowest paid HR Manager at a company paying at p75 of the market for its midpoint (with a 50% wide range) makes more than the highest paid HR Manager working at a company paying p10 for its market midpoint (50% wide range).

Finally, as you can see above even the difference between a p50 and p75 company is substantial (nearly $14,000 at the midpoint). Put another way: In this example, an employee at a p50 company has to be in roughly the 90th percentile of wage earners within his population to earn the same amount as someone in the 50th percentile at the p75 company.

The pay for performance implications here are troubling to say the least, but they illustrate an interesting fact about pay in the marketplace: It is highly variable.

With that all said…

Closing, I want to point out that this *doesn’t* mean you’re better off finding a company with a market-leading pay philosophy and trying to get a job with them. Even if your goal is to maximize lifetime earnings, you’re ultimately probably best off sticking with the company that offers you the greatest opportunities for progression.

An HR Executive at a company targeting just p10 of the market for their midpoint is still likely to out-earn an HR Manager working at a company that3. Caveat: One should always consider the time value of money when doing these sorts of cost benefits analyses as well. If it takes 25 years to make the move from HR Manager to HR Executive at a p25 company, it’s entirely possible you’d have been better off financially having spent your career as an HR Manager at a p75 company (even if you never actually make the leap to executive).targets p90 of the market for their midpoint. 3

As a general rule the biggest jobs pay the best, so look to work at places where you have the greatest opportunity to move up.

Categories: Compensation
Want to Increase Employee Engagement? Open the Lines of Communication

I can’t quantify this as a percentage, but I can say based on anecdotes taken from peers across multiple industries and functional spaces that most organizations have a huge problem with communication. Discussions that need to be had aren’t had at the very highest levels, and the problem becomes more1. Some groups are better at addressing this than others. Generation Y is notoriously collaborative, and as they start to occupy leadership positions many of the communication issues I’m talking about here will start to fade away. pronounced the further one progresses down an org chart. 1

Managers aren’t transparent with their direct reports around why or how decisions are made, pay and performance criteria are often arbitrary, shrouded in secrecy, or both, and major decisions made by senior leaders are seldom first filtered through lower levels of the organization for feedback (or to generate buy-in).

Some groups are better at addressing this than others. Generation Y is notoriously collaborative, and as they start to occupy leadership positions many of the communication issues I’m talking about here will start to fade away.

Corporations today have a communication problem, and it fosters distrust among employees. They often either don’t believe what their leaders tell them, or else don’t expect their leaders to tell them anything of value at all. So they withdraw.

I don’t have an easy answer around how to take on this issue, but I believe companies that start to rise to the challenge now are going to have a built in cultural advantage in the coming years as the economy picks up and employers start having to compete for talent again. Companies whose employees buy-in to organizational initiatives, trust management, and feel they have insight and input into the direction of the enterprise are going to be able to attract a much higher caliber of candidate than competitors who fail on these counts.

Categories: Employee Engagement
Behavior Based Recognition Programs

I want to share a great video on behavior based recognition programs:

1. It’s been a long day for me, so let’s go with a video in lieu of a deep dive. I intend to write on this topic more in the near future, however, and this is a good primer.

Categories: Compensation
Change Management After an Acquisition – How to Marry Two Cultures

The other evening we began an interesting conversation around mergers that I want to elaborate on today. Specifically, I want to touch on a few different strategies available when integrating two cultures and the pros and cons associated with each.

Absorption:

This strategy is best used primarily when there is a significant difference in the size of two companies coming together. In an absorption situation the smaller company is brought completely into the fold and made to adopt the cultural norms and values of the larger/parent firm. I think the biggest pro of this strategy is that it doesn’t expend considerable time and resources trying to mesh the norms and values of two (possibly very different) companies. The biggest con is of course that the merger could end in total failure if the culture being forced to adopt the values of the parent company is materially unable to do so without losing core elements of its value to customers (though if this is the case one wonders why a merger would take place to begin with). The more likely negative outcome of the absorption strategy is that turnover ends up rising considerably as employees unable or unwilling to cope with the culture change leave the organization.

Preservation of Independence

Another option is for both merging companies to maintain their independence. While they become one enterprise from a P&L / share price (if publically traded) perspective, in day to day operations both businesses would behave as seperate companies. The biggest advantage of this approach is that the two companies will maintain what makes them both great, and the biggest disadvantage is that by failing to synergize a lot of value is being left on the table.

Marriage of Culture

In this “Best of Both Worlds” approach, both companies look at what works in their organization while also evaluating what the other company does better. This is a great idea in theory since – as is implied by the title – the companies maximize synergies. In practice, however, the time and resources required to do this the right way are seldom available – and even when they are generating buy in from leadership in both organizations can be very difficult. Even if both companies are of a similar size, the ability to do an honest assessment on both sides requires leadership teams from both firms to set aside hubris and look frankly at strengths and weaknesses. This is easier said than done…

Going to wrap it up here, but as always please share your thoughts below.

Categories: Talent Management
“Pay for Points” Grade Structures

Over the weekend I was thinking about comp structures, 1 and I designed what I think is a wonderfully ambitious compensation program.

It’s based around a “pay for points” system. The structure goes:

Midpoint = Job Points * Function Multiplier + Sweetener

The structure isn’t designed at all around the market rate for jobs (for the most part), and is instead almost entirely based on the internal valuation of work. The Function Multiplier is between 100 (Clerical) and 500 (Executive), with each function having its own specific multiplier based on its relative value to the business. The “Sweetener” is a job specific number that is added on to a job if the internal structure isn’t yielding wages competitive enough in the market to attract talent (in which case the job is market priced and the sweetener is added as a supplement to bring the job to p50).

The jobs point system works using the following criteria:

  1. Education / Technical skill required to do the work
  2. Impact the job has on the P&L (from either an earnings or cost savings standpoint)
  3. Human relations skills required to do the job
  4. Span of control
  5. Safety / Working conditions

The factors are weighted using the following ranges (percentage weights were assigned to each factor and then given a range starting and ending at the beginning and ending of the adjacent levels, respectively):

Note: Level 1 / Safety and Working Conditions should have a minimum of 12.5, but I rounded up when typing in the ranges. Just noticed this after I posted.

So if one wanted to grade an HR Manager on this structure they might get:

In the above case the midpoint for the HR Manager would be 425*150+0 = $63,750 and the salary range is +/- 20% of the midpoint

What’s wonderful about this though is that each level actually has ranges. An HR Manager could theoretically be at a midpoint of:

670*150+0 = $100,500

… If the site he or she supported was large enough.

I love this system because it recognizes that there are different levels of work within any given job while also recognizing differences in the value that various functions bring to the organization.

…Of course, this would be a nightmare to manage as it requires analyses of every job in the organization. Additionally, it has lots of subjective elements (what’s the difference between 13 points and 14 points?) and basically ignores the market (instead looking to attract talent with equity stakes – which I didn’t get into here as I’m still thinking about it).

Categories: Compensation
Hiring for Talent vs. Hiring for Cultural Fit

I won’t try to re-invent the wheel here. Instead, I want to talk briefly about what it means to be “talented”. From there the question of when to hire for talent vs. fit (for me, at least) becomes fairly obvious.

So… “talent” in an employment context generally refers to one of two things:

1. Exceptional technical ability

2. High potential to develop exceptional technical ability

What technical ability a given employer may be looking for of course varies depending on the job, but the possession of a relatively scare or rare skill set – or the capacity to develop one – is highly valuable in the market place.

1. Exceptional technical ability

2. High potential to develop exceptional technical ability

What technical ability a given employer may be looking for of course varies depending on the job, but the possession of a relatively scare or rare skill set – or the capacity to develop one – is highly valuable in the market place.

Unfortunately, in the first case many employers often overestimate the transferability of talent (and spend too much time focusing on cultural fit), while in the second case they underestimate how important the right conditions are for talent cultivation (materially undervaluing fit).

Journalist Geoff Colvin touches on the spirit of what I’m talking about here1. In addition to “Talent is Overrated”, if you’d like to learn more about deliberate practice I recommend the following: K. Anders Ericsson, Ralf Th. Krampe, and Clemens Tesch-Romer. The Role of Deliberate Practice in the Acquisition of Expert Performance. Psychological Review 1993, Vol. 100. No. 3in Talent Is Overrated: What Really Separates World-Class Performers from Everybody Else. 1  In addition to “Talent is Overrated”, if you’d like to learn more about deliberate practice I recommend the following: K. Anders Ericsson, Ralf Th. Krampe, and Clemens Tesch-Romer. The Role of Deliberate Practice in the Acquisition of Expert Performance. Psychological Review 1993, Vol. 100. No. 3

In the book, he shows that with the exception of a select few genetic characteristics that contribute to success in certain arenas (like height in basketball) that talent is not innate. Instead, it is the product of something called deliberate practice.

Basically, the theory behind deliberate practice states that people who are very good at a specific thing are good at it because they’ve broken down what it takes to be successful at their craft into component parts – and then focused on developing those skills in chunks on a day to day basis.

Talent doesn’t always need to be a cultural fit if it stands out.

Assuming this principle to be true, if an employer wants to hire a world class actuary/computer programmer/project manager/compensation consultant/financial analyst etc. the employer shouldn’t be looking at “cultural fit” so much as it should be measuring skill transferability. The asset that the employer is paying for in this case – technical ability – is likely to yield the needed value only if the technical ability the talent has is aligned with the needs of the organization. As such, I would argue that an interview (and job posting) process that accurately identifies and tests for the skills needed to be successful in a role are much more important than cultural fit in cases where companies are hiring for a specific skill or experience.

Conversely, if an employer is hiring a candidate for his or her capacity to learn then the cultural fit is *much* more important. In this case an employer is hiring a candidate largely because of his/her cultural legacy. A candidate’s background (schooling/life experiences/work ethic etc.) make he or 2. And for the record, more jobs require the second type of candidate than the first. The first group is made up mostly of highly technical jobs (doctors, lawyers, scientist etc.) The majority of roles are learned (primarily) on the job and require candidates with the right temperaments and behaviors as opposed to specific technical skills.she an attractive training prospect. 2(And for the record, more jobs require the second type of candidate than the first. The first group is made up mostly of highly technical jobs (doctors, lawyers, scientist etc.) The majority of roles are learned (primarily) on the job, and require candidates with the right temperaments and behaviors as opposed to specific technical skills) As such, if a candidate isn’t a good cultural fit then the work environment will likely prove to be sub-optimal for training purposes (leading to unrealized potential and a presumably failed to hire).

Not all work requires exceptional talent. Often a new incumbent just needs to fit in.

Closing… If I’m recruiting for a role where the incumbent’s existing abilities will define his or her success in the role (and any training is negligible or non-existent), then I am looking for skills and not fit.

On the other hand, if much of what an incumbent does in his/her new role will be based around learning internal processes then cultural fit matters a lot more in the selection process.

In the case of the former the incumbent defines the role, while in the case of the latter the incumbent is stepping into a pre-defined space where his or her ability to succeed will be determined largely by the ability to fit into what the employer does.

Categories: Talent Management

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