The benefits of differentiated pay

Properly calibrating pay differentials can avoid negative employee reactions
By Ken Abosch
|Canadian HR Reporter|Last Updated: 09/18/2015

Should an organization pay employees differently based on either the role they perform or the results they generate? The answer is an emphatic affirmative.

The notion of fairness quickly enters into a debate around the merits of differentiation, with different interpretations of what “fair” means. One version of fair is to pay everyone equally. This approach is not embraced by organizations that are committed to performance-based rewards. 

However, when it comes time to hand out raises, most companies try their best to spread very small merit increase budgets across all employees and this results in minimal differentiation in salary increases and fewer distinctions in pay levels over time. 

The other definition of fair stipulates that differences in pay are defensible when calibrated to differences in responsibilities and contributions. This approach is more consistent with a pay-for-performance philosophy but is also more challenging to execute. Calibration requires an organization to have the tools and expertise to compare and contrast differences in duties and responsibilities. It also requires commitment to providing honest individual performance feedback and to pointing out differences in performance that may not be popular.

It is human nature to want to avoid confrontation, but this approach requires full disclosure that some jobs have different accountabilities and impacts than others. It also requires candid dialogue between managers and their direct reports about their strengths and weaknesses.   

Employees know that differences in role responsibilities and the contributions of specific individuals in those roles provide differences in value to the company. Contrary to what many executives think, employees are not demoralized by differences in compensation that are based on differences in role or individual performance.

In fact, it is just the opposite. It is pay inequity, not pay inequality, that causes negative employee reactions. Pay inequity can result from either unequal pay (with equal contributions) or from equal pay (with unequal contributions).

How differences are established

Here are the most important elements to consider when differentiating the worth of roles and individuals:

• Individual potential is an assessment of the value an individual could have to the organization over time. This factor projects how high an individual could climb in the organization based on her past performance, ability to assume greater accountability and her potential to exert broader influence on broader organizational results.

• Individual performance measures the specific accomplishments an individual demonstrates against annual performance goals. To properly motivate employees, it is important to distinguish the efforts and results achieved by individuals even when large numbers of employees may be working against the same goals.

• Education analyzes the quality and comprehensiveness of academic preparation required to perform work assignments. This factor considers the depth and breadth of academic training as well as the reputation of the institution providing the knowledge.

• Training and experience for many roles is as critical or even more critical than academic preparation. The required levels of work experience gained through on-the-job training or other training experiences should be factored into determining a position’s worth. 

It is not unusual for an organization to apply these elements to create a hierarchy of roles that builds from lowest to highest value. Basic entry-level unskilled or semi-skilled support roles typically comprise the foundation of the hierarchy. Skilled technical employees and entry level professionals overlap with the top end of the support layer and continue up to expert level individual contributors. Entry-level management (supervisors and managers) often lines up equally with advanced and expert individual contributors and ultimately feeds into the highest level of organizational roles — the leadership level.

Three additional considerations are increasingly being considered to determine the value of roles within businesses today: 

• Mission critical roles reflect the capabilities, skills and competencies required to perform work that an organization considers critical to achieving its business objectives. These roles handle projects, processes and technologies that would significantly hamper an organization’s ability to conduct business if they were lacking. A mission critical role may or may not be a hot skill role or one that is hard to recruit. Roles in this category do not shift frequently without a major change in business direction.

• Hard-to-recruit roles are those with capabilities, skills and competencies an organization has a challenge in sourcing and hiring. This could be due to a role being a hot skill role or due to other factors such as company reputation, industry segment, geographic location, local or regional supply and demand issues that differ from the national market, and unique labour market influences. Roles in this category change over time.

• Hot skill roles are those in high demand and short supply relative to demand in the external labour market. These roles will change based on external market conditions rather than factors within the organization’s control. 

Not all roles are of equal value to an organization and not all individuals performing those jobs bring the same degree of value either. Sound economics require there to be an equilibrium between the contributions of jobs and individuals and the monetary value they are assigned. 

Doing so in a disciplined and consistent way will satisfy employees’ needs for equity and create the appropriate level of motivation. The focus should be on how to accomplish this rather than whether it is the correct course of action to take.

Ken Abosch is a partner and broad-based compensation leader at Aon Hewitt in Chicago. 

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