My Talent Strategy Principles: Compensation

As promised, I am going to take each of my afore mentioned principles of talent strategy and define them further.  Interestingly enough, the first four of my principles are related to pay, so it made sense to combine them here and use it as a general vehicle to introduce you to my beliefs around motivation.

No matter your role or industry, your primary responsibility as a manager is the motivation of your people.

Any discussion of motivation or the individual factors of motivation must start with the granddaddy of motivation theories, Maslow’s Hierarchy of Needs.  Maslow proposed a linear model where basic needs must be met before higher-order needs.  This model is typically represented as a pyramid.

The basic concept here is that before people can be intrinsically motivated, the more basic needs must be met.  For example, it is hard to imagine that someone could be motivated by a drive to be recognised as a valuable team member when they are struggling to put food on the table.  So the needs at each level of the model must be met before the next level can act as a motivator (see the Wikipedia page for a deeper explanation of Maslow’s model).

The problem with this model is that it doesn’t play out very well in the real world.  People are simply too complex to be represented in such a linear model.  I’m sure that most professionals can remember a time in their career when they were intrinsically motivated while struggling with lower-order needs.  Can anyone say Help Desk?

A much better model to explain factors of motivation is Herzberg’s Motivation-Hygiene  Theory (frequently called Two Factor Theory).  This model identifies two factors that combined determine an individual’s level of motivation.  Those two factors are:

• Motivators - give positive satisfaction, arising from intrinsic conditions of the job itself, such as recognition, achievement, or personal growth.
• Hygiene Factors -  do not give positive satisfaction, though dissatisfaction results from their absence. These are extrinsic to the work itself, and include aspects such as company policies, supervisory practices, or wages/salary

These two factors influence total job satisfaction.  However, each factor can only influence a single direction.  Motivators increase job satisfaction/motivation and Hygiene Factors can only decrease job satisfaction.  For example, a very low salary relative to the market for a particular position will negatively influence motivation and cause job dissatisfaction.  However, a very high salary will simply eliminate salary as an element of dissatisfaction.  It will not motivate.

I like to think of these factors as being on a balance scale.
If we increase salary and remove it as a hygiene factor, it will increase satisfaction.  However, if we keep increasing salary we don’t get any additional benefit because we can only remove it as a factor.  We cannot turn it into a positive influence.

To keep your team members motivated you will need to maximize the motivators and minimize the hygiene factors.  This can be very challenging because everyone has different thresholds for each factor.  The only way to deal with this challenge is to ensure that you have strong lines of communication open with your team.

Pay enough that salary is no longer part of the conversation
Pay is a very strong hygiene factor.  Perhaps even the strongest.  You could do absolutely everything correct as far as other hygiene factors and motivators and if the perceived pay disparity is strong enough, you will have a severely unmotivated team member, perhaps even disgruntled.  This factor is also the most likely to cause an important team member to seek employment elsewhere (a very costly issue if you consider the team productivity loss, cost of recruiting new talent, and institutional memory loss).

I have always believed that the key to eliminating pay as a demotivator is to simply pay enough that pay is forever removed from the conversation.  This is clearly an easier said than done item, but it is not as difficult as you might think.  The key here is two-fold:

• Senior Management Buy-in – You must get your senior management to buy-in to the concept, even if you already have the authority to set salary ranges.  Your higher-level technology people will likely make more than many of the senior level academic people and you need buy-in to combat the resentment that will result.
• Data – You must accept that you are a biased source when it comes to salary recommendations for your people.  Not only are they your people, but you are also a technologist (at least in the eyes of your fellow management).  Coming to the table with an external, unbiased source is crucial.  There are low-cost/free options out there, such as salary.com, but they introduce a significant self-selection bias and as a result, are not the most credible sources (though they are far better than nothing).  You can also purchase salary data for school districts in your state and try to match up the responsibility and skill levels (not as easy to do as you might think in the K-12 world, where we have tons of silly titles, i.e. deputy chancellor of blah blah, director of sharing, etc.).  The best option is to have a professional firm do a comprehensive salary analysis for you.  This can cost as little as a few thousand dollars and is worth every penny.

Paying enough that pay is no longer part of the conversation does not end with paying enough.  You have to talk about compensation as well.  At this point you have to be wondering about this glaring contradiction.  The goal is to remove pay as a background conversation with your team member.  If you just pay enough that the background conversation goes away and do nothing else, it will eventually come back (I call this Happiness Entropy).  During your performance reviews, which I recommend doing every six months, you should walk the team member through the same data you used to determine their salary range.  Just like you had to convince Senior Management of the appropriate salary ranges, you need to convince the team member also.  This semi-annual conversation is also the perfect time to bring all the other non-pay benefits together and communicate a total value package for the team member.  Don’t forget to highlight those benefits unique to the K-12 world, such as Teacher Retirement System, Health Insurance, extensive vacation, access to education credit unions, or teacher discounts in the community (I get discounts at nearly any book store for being a school district employee).

Avoid large pay disparities
You must always assume that people will find out what their fellow team members are paid.  This is particularly true in a public school district where that information is not only published, but is also freely available as an Open Records Act (Texas state version of FOIA) request.  This is also true in a private organization (even where company policy defines disclosing your own salary as a termination offense).  The simple fact is that people talk to each other and few people enjoy keeping secrets.  So assume that this information will become known by your team members and ensure that each position on your team is paid within an acceptable range for the duties that they perform.  This issue typically is most acute with internal promotions, not external hires.  The natural tendency is to promote someone and give them a percent of salary raise.  With this methodology you end up with the greatest disparity for your highest-potential team members… those that have been promoted several times.  The key is to define salary ranges for each position and remove percent increases as a factor in promotions.

Use bonuses to differentiate performance
This is a K-12 industry exclusive principle and I do not recommend heavy use of annual bonuses in the private sector.  The reason is that they are simply not very effective in reducing the compensation hygiene factor.  Every dollar I spend in a bonus is not anywhere near as effective as the same dollar simply added to salary.  There are several reasons for this:

• Bonuses incur a severe tax penalty - because a bonus is outside of the predicted salary (and thus disconnected from the tax tables used to calculate withholding), most payroll departments withhold at least 30%and I have worked places that withheld as much as 50% just to be safe (tax code identifies a minimum withholding for bonuses).  So right out of the gate you are losing a significant chunk of the perceived value.
• Bonuses are not predictable - A bird in the hand is worth two in bush.  Salary is perceived as a sure thing, while bonuses, no matter how regular, are not.
• Bonuses are often not considered income – Frequently, financial institutions will not consider bonuses in debt/income ratios.  This can have a significant effect on large ticket loan qualification (i.e. cars, houses, etc.).
• Bonuses have a low frequency – Typically, a bonus is given once a year or twice a year at the most.  An increase in salary appears on every paycheck.  You do the math.

We have established that annual bonuses are not very effective.  So why would I even list this as a principle?  In the public sector it is not uncommon for salaries to be exceedingly difficult to change.  In school districts even the lowest salary range may need board approval and there are numerous cases where salary ranges are too narrow to accomodate acceptable performance/experience ranges within a single position (or sometimes even a range of positions).  In these cases, an annual bonus might be more attainable.  Put simply… something is better than nothing.  You have to consider your politics.

Leverage the power of spot bonuses
At this point you might be blowing a gasket… “What?! Didn’t he just explain that bonuses are evil?!”.  Yes, yes.  Let me explain.  Annual bonuses are not very effective at reducing hygiene factors, at least as compared to salary.  However, spot bonuses can be very effective as a motivator.  The money is just a vehicle.  The real purpose is supporting a sense of recognition and achievement.  Very small amounts of money, given as a reward for a significant accomplishment, can be very effective at motivating a team member (and to a lessor extent, the entire team).  Here are some of the rules I follow concerning spot bonuses:

The amount should be small – I would not do more than a couple hundred dollars.  In fact, I prefer $100.  Why?  Well first of all it is not a large sum of money and I have a budget to manage.  But the primary reason is that they are more likely to do something special with the money and will associate your organisation with that special event.  This could be a date night with their significant other, a frivolous purchase of pleasure (think Xbox game, music, etc.), etc.  The point is that it is small enough to be spent on a single event/item and the organization benefits from that association.

• The awarding of the spot bonus should be as public as possible – You want everyone on the team to know.  There will be a small motivating effect on the rest of the team.
• The spot bonus should be for a singular ”above and beyond” event – Don’t dilute the motivator effect by awarding spot bonuses for accomplishments that are expected of everyone.  If you do, you run the risk of turning this into a hygiene factor.  it is also important that it is a singular, definable event, not an ambiguous “you’ve doing a great job”.  Remember, you are using this technique to motivate the entire team, not just an individual.  They need to know exactly what was done.
• Structure the spot bonus to account for tax withholding – If you want to give a $100 bonus then make the actual amount enough to cover the tax withholding, $200 if your organization withholds 50%.  This avoids the discontinuity between the bonus you communicate and what shows up on the check.
• Present the spot bonus in a physical check – This gives a physical artifact for presentation and makes it a more concrete experience for the bonus recipient as well as the rest of the team.

Ignoring these principles WILL be costly
In my past three years, the only regrettable attrition I have experienced on my team has been solely the result of dissatisfaction concerning compensation.  Those departures not only seriously hurt my team, but they also had very direct cost implications.  Beyond the simple cost of replacing talent, we incurred delay and overrun costs on projects for whom those individuals were key resources.

The story continues…

1. My Talent Strategy Principles: The Original
2. My Talent Strategy Principles: Compensation (You are already here)

My Talent Strategy Principles

Back in graduate school, I took a couple of courses on Org Theory.  In these courses we studied many things (Org Theory is an absurdly broad topic with far more theories than practices), but one of the items that was particularly interesting to me was an examination of what makes a good executive and how high-performing executives are able to make good decisions quickly, with imperfect information. There are many theories on this topic, but one in particular had a strong ring of truth to it and has always struck me as being the most sensible.

The idea is that over the course of their career, the high-performing executive develops a set of principles that guides their strategy and enables them to make very fast decisions.

Notice I do not use the term “successful”… we all know successful executives that are dolts and gained their position via the Peter Principle… I am talking about you US airline industry

These principles are typically formed early in a career and come from lessons learned, formal education experiences, and influential people (parents, first great boss, mentors, etc.). Once this foundation exists, decisions can be quickly tested against this set of principles. The slightly-nerdy part of me would call this a set of business rules for decision-making. The very-nerdy part of me would call this a series of conditional test algorithms comprising a heuristics model for decision-making. Let’s take the “business rules” path and avoid making my brain hurt.

With ever-increasing frequency, I get “how did you do that?” questions from my industry peers (and every now and then a Superintendent or CEO). Whether the question relates to performance management systems, ERP, high-service levels, or simply cost picture, my answer is almost always “I built a good team”. That answer usually prompts a series of requests for org charts and job descriptions. While these artifacts are standard fare in our roles and as long as we have HR departments we will need them, I don’t feel that they are particularly important (though I do believe that the process of creating them has its value). The question I think should be asked is…

How do you build a good team and how do you keep it all together?

Whenever I try to answer this question I start to rattle off single-sentence advice tidbits and quickly sound like a business school version of Everybody’s Free to Wear Sunscreen.  I have come to realize that I have my own set of principles, developed over the course of my career, and that I do not typically think of them in concrete terms.  As an exercise to help me both identify these principles and articulate them more effectively, I decided to give them substance by writing them down.

• Pay enough that salary is no longer part of the conversation
• Avoid large pay disparities
• Use bonuses to differentiate performance
• Leverage the power of spot bonuses
• Do not make the mistake of believing that you compete for technical talent with the K-12 sector.. you compete with EVERY sector.
• A high-end team is the cheaper option
• Foster a sense of elitism in your team
• Firing is far more important than hiring
• Bad attitudes are infectious, abate the wound
• Balance your team with external hires and internally developed talent
• Build a promotion path for the entry level positions
• Titles matter
• Training is sustenance, not luxury
• Support regrettable attrition

Many of you will disagree with at least some of these principles and you might even think some of them are crazy (Support Regrettable Attrition usually elicts an “Oh.. he’s soft in the brain” response).  I encourage you to call me out on anything you believe is wrong.  I am a work in progress and as such, so are these principles.

In future posts I will take each individual principle and give a deeper explanation… stay tuned.

The story continues…

1. My Talent Strategy Principles: The Original (You are already here)
2. My Talent Strategy Principles: Compensation