Of late, a challenge is being seen in organisations to pursue a model to compensate their employees in such a way that motivates them, as well as does not impact their profitability. In the same context, I tried simplifying all related concepts, here.
Industrialisation brought in the challenge of how and what to be paid to workers being employed to undertake certain jobs. These jobs primarily were having tasks which were repetitive in nature and therefore, once a skill was developed, more or less all workers were equal in their performance. This sowed the seed of Pay for Position or Job based Pay, whereby based on the knowledge and skill, a person was having and were being utilised by him to perform to achieve certain pre-determined level of performance, equal wages were paid. This led to a model that focused on compensation tiers tied to job titles. In a way, additional levels of responsibility combined with senior level job titles with higher compensation are a clear path for employee’s career development. But with changed scenario today, this Pay for Position model promotes mediocre or average instead of excellent or extraordinary. In earlier times of less business urgency, the mediocre factor was an insignificant issue. Mediocrity is promoted when everyone is lumped into the same bucket. Paying the position suggests that all employees are identical in the contribution and their value. Pay for Position can very well be defined as how and how much employees should be compensated for fulfilling their position’s responsibilities, ensuring internal equity and external competitiveness. This model emphasises on slotting of each position into a grade level and weighted based on the education and experience the job requires and the number of staff who report directly to the person in the position. Pay raises are scheduled as an employee's tenure with the practice increases.
The alternative to job-based pay is to compensate staff according to the value of their skills in the market. The most common approach is Competency-based pay or Pay for Person. With the change in the business function and realisation of the fact that it is not only Knowledge and Skill which are important to perform a job, it is more important what all competencies one display. These competencies have become paramount today. To explain it further, if a person is having knowledge and skill but not right abilities or competencies to use them in today’s VUCA world, he may not be successful in driving himself and ultimately achieving desired results. These competencies do vary in degree of presence from person to person. This variation leads to the need to compensate for competencies and their importance to organisation. Business today involves a greater sense of urgency than in years past. There is less patience and a higher demand for obtaining results. Business today is more about delivering value and therefore, more about paying for performance. “Paying the person” in today’s business model is equivalent to paying for performance. It is a known fact today that not all employees are identical. Therefore, their efforts and their performance is not identical. Therefore their total compensation should not be identical. Pay for Performance can be defined as how and how much employees should be rewarded for their own contributions to the organization’s annual results due to one’s competencies, ensuring internal equity and external competitiveness, and ensuring alignment with corporate values and capacity-to-pay guidelines.
Along with these two, the other fact came into prominence was the real reason of recruiting a person and this is that the person has to perform to the maximum level, he can. A person is to perform to the extent of Knowledge, Skill and Abilities one is possessing and therefore, came in existence Pay for Performance into the market. Under this model, both short and long term rewards are considered.
On screening business needs, it would be quite clear that all these three models go together in any organisation. I will try explaining it with an illustration:
There is a need to hire a General Manager, for example in Production Department of a company. The first this which shall be done in any situation is to lay down the basic requirement for the position. Say, one should be having a Graduate degree in Chemical Engineering with 20 yrs of experience and has handled a team of 20 people etc. It means one cannot become General Manager-Production until one has these requisite qualification. Thereupon, based on demand and supply of such professional, market fixes a range of compensation to be paid to the role holder. It means all General Managers if start at the same time, would be commanding salary within a specified range in an organisation. It is only one’s coming on board, differentiation can be seen among all General Managers in terms of outputs through unique display of competencies. In case the new General Manager displays extra ordinary competencies, knowledge and skills remain more or less constant, he commands higher compensation on pay revisions. It means due to his display of unique competencies, he being compensated higher. This is called as Pay for Person. The other model of Pay for Performance can also be seen in paly depending upon the performance of the individual, year to year and accordingly, variation on bonus etc. being paid to him. In case the new General Manager continues to be extraordinary in his displaying competencies and achieving results, then he can be elevated to next level and be paid higher compensation that will differentiate him, but comparable to all new peers in the higher level.
The management however must also keep an eye on other factors too, like although a person can be extremely talented but even then also, there should be linear link in compensation among all comparable General Managers. It is recommended that whatever said & done, a range should be of 0.8 to 1.2. It means all factors like knowledge, skills remain constant, competencies can make a person outperform and demand a salary 40% higher than the lowest paid in the category. If it is more than that then the person is promoted to next level with higher compensation & responsibilities.
Conclusively, all three models of Pay for Position, Pay for Person and Pay for Performance play their role in defining the compensation of an individual.