Traditional Salary Systems Are Going the Way of the Dinosaurs

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What is the future of salary management? If current trends continue, employers will be forced to adopt a new program model.

Here are the reasons:

First, pay transparency is the future. Those who have worked in the field for any period know it has changed dramatically over the past two or three decades.

Not too long ago employees were told nothing more than their salary. Now, there are employers like Whole Foods that make everyone’s salary public.

A move away from traditional evaluations

President Obama recently signed two executive orders that open the door to transparency in federal contractors. Plus when Hillary Clinton was a U.S. Senator, she was one of the original sponsors of the Paycheck Fairness Act. Concerns about equal treatment will push employers toward transparency.

A separate trend is the interest in moving away from traditional year-end performance ratings. It is not clear how many employers have actually eliminated ratings but the debate has been raging in the blogosphere for weeks. Even ardent defenders of the practice have to acknowledge ratings can trigger serious employee relations and legal problems.

Three decades ago, TQM guru Dr, W. Edwards Deming argued for eliminating ratings, referring to the practice as one of the “seven deadly diseases” of management.

One of his points was that ratings are not a valid measure. It is clear that if a groups of supervisors were asked to evaluate an employee’s performance, using the common five-level scale, they would not all agree – and that is evidence supporting Deming’s argument.

This may not be surprising, but if employers were forced to defend ratings, most would lose the battle.

An agreement on “extreme” performers

Recently, a federal agency was forced to eliminate ratings because of claimed discrimination. The facts were only partially disclosed, but in media reports the union criticized the ratings because every employee subgroup was not treated equally. From one perspective, it was a ridiculous argument; from another it’s easy to see defending ratings is a losing battle.

Research shows that there is agreement on the extreme performers. We know and agree on the stars and the few unacceptable performers – the “A” Players and the “C” Players. They stand out. It’s the rating categories in the middle where disagreements occur.

As someone who has managed pay and performance systems in two large companies, I am convinced that three level rating scales minimize the ratings problem. It’s not coincidental that forced distribution policies are based on three levels.

The traditional performance management process has never worked as described in textbooks.

Decades ago, psychologists tried and failed to develop valid ratings scales but recently the focus of the criticism has been the way managers handle their role. “If only managers ...” is not a defensible answer, however.

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Regardless of how the scale is defined, or what sources of performance feedback are available, ratings are based on judgment. With transparency, managers will be under the gun to explain their decisions.

Publicizing salaries would raise lots of questions

The point in writing is that the two trends are likely to come together in the near future. For the past half century HR has been a vocal advocate for fairness and equity and for pay for performance. But despite the rhetoric, if individual salaries and ratings were made public, it would trigger a lot of questions.

Some are likely to disagree, but here is where what employees will see that is inconsistent with what we have been telling them:

  • Unfortunately, women and minorities continue to earn less – the gap still exists.
  • Employees in lower graded jobs can be paid more than those in higher graded jobs because of overlapping salary ranges.
  • We contend we pay for performance, but older workers are consistently paid more than young workers because of compounding over the years.
  • New hires sometimes start at higher salaries, while increases for current employees through the recession were frozen and are now below market.

The explanations for those pay differentials are not consistent with stated pay strategies.

Is pay for performance fair?

Another problem is trying to convince employees a pay for performance policy is fair if they know ratings are not honest or if ratings are eliminated. Companies will be adamantly opposed to returning to longevity or cost of living increases. However, employees who believe personnel actions based on ratings were unfair could have the courts on their side.

Anyone who believes this will not happen should consider the stories coming out of the Veterans Affairs scandal. A New York Times headline read, Every Senior VA Executive was Rated ‘Fully Successful’ or Better over 4 Years. In an open book environment, granting inflated ratings makes a manager’s job easier.

I see the potential for the salary program model shifting to bands finally replacing overlapping grades and ranges. I appreciate the problems some companies have had with bands. In the absence of ratings, calibration committees can be responsible for confirming the stars and the “turkeys” based on manager nominations. There are alternatives to traditional practices.

We need to maintain defensible pay for performance practices. We also need to pay competitively.

But the most important issue is satisfying employees that their pay program is fair. If current trends continue, we will need an alternative program model.

Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He recently became the editor of the journal Compensation and Benefits Review. He also has an MBA and Ph.D from the Wharton School of the University of Pennsylvania. Contact him at h.risher@verizon.net.

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