Compensating your employees fairly, but not equally, can be crucial to success Featured

8:00pm EDT August 26, 2010

Compensation planning and decisions remain challenging management tasks in many businesses, even large ones. Money is tighter than ever and there is plenty of opportunity for faulty plans to emerge guided by business owners’ lack of attention to, or comfort with, the process. Contrary to popular thinking, fairness doesn’t require us to treat every employee the same. In fact, provided we are non-discriminatory in our decisions, employees are often happier and more productive when they are not treated the same way in matters of compensation.

Smart Business spoke with Peggy Pargoff of ManagEase about how to reward your best employees and why you shouldn’t treat all employees the same.

How should employers address compensation?

It is a best practice to assess compensation and performance at least annually. Ask yourself: How important is compensation in our industry or area? Are we competitive within our market? Are we successful in hiring and retaining good performers? What does this mean with regard to compensation planning?

Participating in an industry salary survey or acquiring local pay data can be important to making good decisions. Creating salary ranges for positions and re-evaluating these over time also helps ensure a good program stays in place. Ensuring that employees who started 10 years ago are not disadvantaged in pay over current hires brought in at higher starting pay is also crucial to fair compensation.

While compensation technically includes benefits and non-cash reward programs, the amount of cash a person receives is still usually paramount. Non-cash rewards like regular company-sponsored lunches or generous sick time programs build morale and can positively impact retention, but don’t pay the employees’ bills.

What is the cost of flat compensation?

First and foremost is the loss of your best employees and salespeople. When compensation is flat, those employees who are at the top of their game and have good skills will look for better paying jobs. In fact, competitors often seek to steal top performers during down market cycles when small raises can cause good people to jump ship. Those employees with marginal skills and no ambition hang on to their jobs with even greater tenacity because they know they can’t compete for a new job. This can cause a downward spiral in overall employee quality.

The second impact involves a subset of employees who seek to increase their ‘compensation’ by exploiting regulatory claims, filing unwarranted workers’ comp claims, embezzling or stealing products or customers.

The third impact involves the costs of recruitment and training, loss of experience and expertise, or customer relationships, which can be far more than providing modest compensation increases to your good people.

How can an employer determine who deserves raises?

The practice of giving cost of living adjustments (COLAs) across the board should be gone, but is not. Business owners who may be uncomfortable with compensation discussions often fall back on giving everyone a 2 percent raise, thinking they are being fair. A 2 percent raise does not make a discernible difference in pay for most employees. And COLA strategies favor the weakest and worst performing employees over the high performers and discourage great performance.

Unfortunately, compensation decisions are often not kept confidential and it’s prudent to assume your decisions will become known. This underscores the need for objective legitimacy in the decision-making process. Set quantitative benchmarks and standards for performance whenever possible and communicate to employees which soft skills are valued. This makes it clear what contributions will be rewarded. If your managers are making compensation decisions, ensure they are using the same criteria. Should employees learn that you have provided raises only to the highest producers or best contributors, the fairness of your decisions can mitigate disappointment in their own exclusion. At the least, you will send a powerful message that your rewards system has integrity.

How can employers manage the ‘no-raise’ message for the best possible outcome?

When business performance prohibits raises, it’s important to get out in front of this decision with the proper messaging. You might say, ‘Profits are down 15 percent, and we have to defer raise reviews until January. I wish we could make another decision at this time, but we cannot.’ This message should not be communicated via memos, e-mails or water cooler gossip. Frank discussion with employees, individually or in groups, shows respect for their need to plan their lives and financial matters. If you have a large business, taking time to ensure all managers communicate this message consistently is crucial. If you need to delay raises again, give employees a new date when your decision will be reviewed. Avoid creating confusion and uncertainty to prevent having employees share their frustrations with customers or vendors.

This process is often not just a one-time activity. Consider providing some simplified information on what’s being done to reverse declines and return to normal operations in order to enhance morale and productivity during difficult periods. Regular updates help people see light at the end of the tunnel.

How can employers create money for raises?

One approach is to eliminate one or two positions held by low performers and use their compensation (or part of it) to provide raises to the better performers. Often good people will gladly shoulder more work for higher pay. Redesigning territories so the retained sales people can achieve higher commissions may also be a reasonable alternative to continuing pay for all sales people, including the underperformers. In many companies employees see this as a fair solution because it acknowledges that some employees are contributing and some are not.

Peggy Pargoff, PHR, is senior vice president at ManagEase. Reach her at or (714) 378-0880.