When envisioning an efficient workplace, it’s easy for employers to fall back on conventional wisdom — employees tucked away in cubicles, metaphorically ticking off items on a checklist that lead to a 3 percent raise at the end of the year.
As business leaders and human resources professionals learned at the Employers Council’s 2019 Employers Summit — held Aug. 26 at The Antlers hotel — holding fast to time-honored conventions can hamper both personal and organizational success.
In the current age of low unemployment combined with a highly mobile workforce, employers need to examine a true “pay for performance” system, rather than mechanical increases for performance, said Lou Lazo, a Denver-based compensation consultant with the Employers Council.
Performance management protocols typically establish a link between an employee’s pay and job performance, but “performance management, as it’s typically put together, is not enough for achieving pay/performance equilibrium,” Lazo said.
“Performance management is a must-have system — you need it for goal setting, employee development, and to review performance against goals,” Lazo said during his presentation, In Search of Pay/Performance Equilibrium.
“But part of the problem with performance management is [that] when we hardwire it to our compensation system, then we need some additional levels of precision. We need checks and balances. … The more controlling we make the performance management appraisal system, the more the manager pushes back because they don’t want to do it.”
Pay-performance equilibrium is a function of three factors, Lazo said: the job market as understood by the employer; the link between pay and performance; and barriers constructed, often unwittingly, by employers.
“Often we do things that we think make sense,” Lazo said. “We think we’re creating parameters to operate within, but when we take a step back, we realize we’ve created barriers to pay/performance equilibrium.”
Defining the market
Markets “are simply the place where [employers] go shopping for talent,” Lazo said. He encourages employers to look at both the broad market and the narrow market in order to understand both parts when pricing jobs.
“When I put the data together, I can see the difference between my small market and the big market, and that informs decisions that I might need to make about compensation,” Lazo said. “If I’m constantly going out there and saying, ‘I can only afford this much,’ it also tells me that I may be missing out on large segments of the market.”
Employers must determine salary ranges, or internal control mechanisms that control the entry-level, mid-point — the pay level for an employee with all the necessary skills and continually meets performance expectations — and maximum, which is the most the employer is willing to pay their best performers.
“Your ranges should reflect your pay philosophy — ‘How competitive do we want to be in the market?’ — they should reflect the definition of the market, and they should reflect your ability to pay,” Lazo said. “We can never ignore the fact that we only have limited resources within our organization. Especially now because there’s so much data that’s available to individuals — now they can go to salary.com or any number of places, and they actually have pretty good information.
“We have to be prepared to say, ‘Yeah, we know what the market is. We also know what we can afford to pay, and this is our structure.’”
Lazo was quick to point out that the maximum amount does not necessarily mean the maximum salary for every individual employee.
“If we’re going to find pay/performance equilibrium, and if we decide that our ranges reflect performance, the maximum should be reserved only for those best performers — those people who can find that same amount of money in the marketplace,” he said. “The terminal point in the range is different for every single individual.”
Salary range width is contingent on the job, Lazo said. For craftsmen, administrative employees and lower-level professionals, salary ranges tend to only be 30 to 40 percent wide from the bottom to the top. For senior professionals and executives, a 50 to 60 percent range, or more, can be very normal, he said.
“The important point there is, it’s a job by job thing. … With a 50 percent range on a 30 percent range job, you’ve created problems for yourself,” Lazo said. “That’s one of those artificial barriers that we construct that we don’t realize we construct. One size doesn’t fit all — shouldn’t fit all.”
Moving employees through the range
In current environments, the average annual salary increase is less than 3 percent for an “average” employee, and 5 percent for a superior employee, Lazo said.
In a 40 percent range profession, it takes six years for an employee to move from the minimum to the midpoint range at an annual increase of 3 percent — but for those types of jobs, the learning curve is typically six months, Lazo said.
“I hire somebody at the minimum, I train them up, within a year they’re fully competent relative to the marketplace — and they’ve got to wait three years to get to the market rate?” Lazo said. “The math doesn’t work.”
Research shows that outstanding performers normally are doing twice the work of their average counterparts, Lazo said.
“Pay/performance equilibrium says, ‘That person is doing more than the average [so] I need to get them in equilibrium with performance and pay as quickly as possible,’” he said. “If we don’t do it, they’ll test the market.”
Spaces and places
In today’s workforce, employees across all generational lines — Generation X, Millennials, Generation Z — are thinking about their workplace expectations in much broader terms, said Ken Pinnock, director of people development at the University of Denver.
“Part of that is, they look at the overall employee experience: What is the workspace? What is the work environment actually like?” Pinnock said during the conference’s afternoon keynote address, A Place…not Space Drives Productivity, Engagement and Well-Being. “That’s showing up globally.”
A tangible work space is less important than the ability for employers and employees to create a sense of “work place,” Pinnock said. Engagement tends to drop in open-office environments because employees want the option of withdrawing into their own space, he said.
“It turns out that the disruption to what some might think of as the traditional workspace — going from single office structure — is that [employees] don’t have room to think big and they don’t have a space to feel safe — which is why people that are in an open office will often call in and take more sick days,” Pinnock said.
Pinnock linked this data to the “prospect-refuge theory of human aesthetics,” developed in 1975 by geographer Jay Appleton.
“The idea is, for people to be most successful, they need the ability to see what’s in front [of them], to create, to observe — but then they also need a space to come back where they feel secure,” Pinnock said.
More and more employers are abandoning the open office concept in favor of co-working spaces or even working remotely, although both come with their own set of obstacles, Pinnock said.
A common misperception associated with remote workers is, “If I don’t see them, they’re not working,” he said.
“The data is pretty clear that people who work remotely have more engagement, they’re retained longer, older-aged workers will stay in the workforce longer,” Pinnock said. “More work gets done, if we’re going to be crass about it.”