What if Pay Was Based on Contribution?
Originally published in: HR Professionals Magazine
Not all are created equal.
Think about that for a moment. This statement rings true in almost all aspects of life. A Maserati is not priced the same as a Nissan Versa. A home near a school in a safe neighborhood is priced differently than a similar home in a crime-infested area. A laptop has a higher purchase price than a comparable desktop. Two companies being acquired at the same time may sell for wildly different purchase prices.
How do we determine the difference? In one word; value.
Value is defined as:
The monetary worth of something; market price
A fair return or equivalent in goods, services, or money for something exchanged
We determine value on goods, services, and yes, even talent. We struggle with the concept of compensation. In today’s work environment, we distinguish pay based on job and job title. However, we are uncomfortable talking about and working through pay discrepancies between individuals in the workplace. There are several reasons for these concerns including the following:
Lawsuits: The litigious nature of our society
The equal pay for equal work movement
Fear of discrimination
While all three of these issues are interrelated, they each have a distinctive aspect.
It is commonplace for employees to sue employers, and there are thousands of EEOC complaints each year. Ironically, the number of cases has not declined over the years.
The EEOC states, “The right of employees to be free from discrimination in their compensation is protected under several federal laws, including the following enforced by the U.S. Equal Employment Opportunity Commission: the Equal Pay Act of 1963, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and Title I of the Americans with Disabilities Act of 1990.”
Our laws regarding compensation discrimination include all payments made to or on behalf of employees as remuneration for employment. All forms of compensation are covered. This includes salary, overtime, bonuses, stock options, profit-sharing and bonus plans. It also includes benefits such as life insurance, vacation and holiday pay, cleaning or gasoline allowances, hotel accommodations, reimbursement for travel expenses, health care, etc.
Equal Pay for Equal Work
The Equal Pay Act requires that men and women be given equal pay for equal work in the same workplace. While jobs need not be identical, the work must be substantially equal. Factors affecting the pay evaluation process involve the following:
Establishment (a distinct physical place of business and not the entire enterprise)
Fear of discrimination
Companies worry about discrimination and the perception of discrimination. Lawsuits are costly and divert attention away from the business via depositions, court filings and more. For instance, last year Humana paid out $2.5 million in a settlement they reached with the OFCCP.
In an effort to avoid lawsuits, employers are meticulous when standardizing pay systems. Typically, you see three types of pay structures:
Broadbands are pay bands. The minimum and maximum pay ranges for these bands are broad. This was a common form of pay structure when employees stayed with the same company for extended periods of time. A pension plan or company-provided retirement was more common then.
This is a pre-arranged, scheduled form of pay. An employee’s pay starts at a fixed point and increases to a higher fixed point over time. This type of pay structure is based heavily on tenure and was effective for the time when it was commonly used. There are current exceptions, such as police officers and firefighters, in which this pay structure is still used quite effectively. Step structures are generally not appropriate for shorter-term employment relationships. They do not provide the flexibility needed for fast-changing industries and market-responsive companies.
Grades and Ranges
Pay grades are used to generate the amount workers will be paid in a given job. These pay grades are most often based on experience and education. Grades are a set of ranges that are mathematically aligned to one another. Like jobs/roles are clustered together within grades based on the market rate, level of responsibility, and value to the organization. It is important to note that ranges are tighter than broadbands.
If there’s a disparity in pay, an employer must prove that it’s justified by:
Pay system based on quantity or quality of output; or
Any factor other than sex
Because an employee’s compensation is typically based on the market-value of a job and experience level, most company’s pay structures are based on the work the employee is doing and the number of years that person has worked.
However, we have all known people with thirty years of experience and some with one year of experience repeated thirty times. All time in the workplace is not utilized equally. Why do we treat it this way?
The simple answer: it is clean and seems objective. It reduces the chances a company will receive a complaint or be sued. Using this process creates the appearance of inclusivity and a lack of discrimination. However, we also lose something in this process. We have lost our emphasis on merit.
Unfortunately, the loss of emphasis on merit has created an incentive for employees to move from job to job to strategically increase their pay.
Merit means to deserve or be worthy of something such as a reward, punishment, or attention. When we are no longer able to truly focus on merit, we reward loyalty, education, and resume experience. We have all seen low to average performers who seem to consistently land great jobs. One explanation for this phenomenon is the approach to compensation, evaluations and rewards.
A different way to think about careers, career progression and compensation is to view it through the lens of contribution. What does an employee actually contribute to an organization? There are four core ways an individual contributes to its company.
Learners are like sponges. Their role is to listen, learn, demonstrate reliability, follow direction and easily adapt to new ideas. This is also the time to learn about the culture of an organization, team or function. Employees contributing in this manner are typically new to the company or new to their role. During initial training, these employees cost the company money, or in a best-case scenario, a break-even situation. Companies invest in new employees with hopes of leveraging their talents in the future.
Individual contributors deliver results. These are the employees that put their skills to work. They are not only reliable but they are also credible. They have invested time developing their expertise and internal company network. Individual contributors are independent, effective, and build their reputation based on the quality of their work. As they progress, they can become problems-solvers and innovators.
Leaders transition from doing work to working with and through others. Leaders focus on removing barriers for their team and individuals. Leaders spend much of their time coaching and influencing people and growing the bench strength of their team. Their focus is on broadening their perspective, expanding their knowledge base, and promoting cross-team collaboration. Leaders also develop strong external networks, such as industry contacts, that help keep their organizations aligned with trends.
Visionaries are rare. These are the executives that inspire change, direct strategy, and communicate the direction of the company. Visionaries think at an enterprise level and promote innovation. They scrutinize the landscapes of the economy and their industry, as well as the competencies and capabilities within their organization to create growth and form alliances with partners, suppliers and customers.
These players have varying worth within an organization. Bill Gates was under thirty when he filled the visionary role, with one statement, “A computer on every desk, and in every home, running Microsoft software.” He had little experience and was a college dropout, which shows that age, education and experience should not be factors that determine value. Contribution can be measured. Isn’t it time we start paying based on contribution? After all, not all are created equal.