In my professional career, I’ve found that we don’t spend enough time explaining to employees how they get paid. What I mean by that is organizations often do not share the factors that determine pay ranges, etc. Which is why employees can get confused – which leads to today’s reader note:
Hey! I have a quick (but perhaps complicated) question for you. Is there a general rule of thumb for how much additional money a manager in a corporate setting should be paid based on the number of direct reports they have? (i.e., if 3 new employees are added to a manager’s team, how much is managing each of the 3 new employees worth – aside from other responsibilities?). The example may have some grey area but I’m curious to hear what this could look like for a medium-sized company. Any help is greatly appreciated!
To help us understand employee compensation, I asked Ann Bares if she would share her expertise and, lucky for us, she said “yes”. Ann is managing partner with Altura Consulting Group and contributor to the Compensation Force and Compensation Café blogs. You might recognize her name because she’s helped us before on this post about providing your W-2 to get a job.
Ann, let’s start by covering the fundamentals of compensation. What are the individual factors that go into compensation?
[Bares] Most companies today rely heavily – though not necessarily exclusively – on the market value of a position as the primary determinant of pay opportunity.
A minority of companies use actual factor-based compensation systems – which establish the value of a job by rating it against ‘compensable factors’. These typically include knowledge and experience requirements, problem solving, decision making accountability, relationships, and communication and often something that measures the ‘scope’ of the position.
With that said and referencing the reader’s note, position scope is rarely tied discretely to the number of employees except at a higher level (where we might recognize that a leader overseeing the work of 1,000 employees may have broader scope than on one overseeing 500 or fewer.
This might be a bit repetitive but, how is compensation determined for any position?
[Bares] Typically two things – the worth of the job (see above) and then what the individual brings to that job in terms of credentials, experience, and performance.
As someone with history in this field, I can tell you that compensation ‘best practice’ has moved away from basing the pay opportunity of individual positions and employees directly on their number of reports. Several decades ago, pay opportunity was very often determined by ‘factor-based’ approaches – job evaluation approaches that established job value (grade, points, what have you) based on rating the job on several ‘compensable factors’. Typically, these factors would include, at least for management employees, something like ‘direct reports/direct span of control’ which essentially gave credits based on the number of employees reporting to a position.
For the employee who is saying to themselves, “managing more direct reports means more work for me”. What’s the rationale for moving away from compensable factors to market value?
[Bares] As organizations and work changed over the past decades, and many organizations moved away from very hierarchical structures (lots of layers) to more flattened and even web/matrix based models, rewarding people based on the number of employees they supervised became counter-productive. It encouraged empire-building and discouraged newer, more effective ways of working which leveraged relationships inside and outside the organization. Increasingly, we would find that some of the most skilled, influential, valuable, powerful people in newer organizations were those with a very small set of direct reports but the skill and ability to get things done through non-reporting relationships.
With this, focusing on employee numbers as the measure of the scope and importance of a job or even a company has become somewhat passé. It just doesn’t fit how value is created in today’s world. It reminds me of a Compensation Café post I wrote a few years ago about Kodak. They once employed over 145,000 at the height of the analog photography age. Shortly after it filed for bankruptcy, digital photo sharing company Instagram was sold to Facebook, which employs a fraction of the people Kodak once did.
If an employee has questions about their compensation, how can they ask human resources? What’s the best way for an employee to prepare for this conversation?
[Bares] From HR’s standpoint, compensation opportunity is based on the value of the job (typically in the marketplace) and then what the individual brings to the job in terms of performance and the outcomes they achieve. It’s helpful for an employee to think about those things.
Research has repeatedly demonstrated that we are utterly unable to fairly gauge our work and our performance relative to our peers. We all believe we are top performers – but clearly that isn’t possible. One way to have a productive conversation with HR about your compensation is to go in seeking to learn and understand. Come with questions, rather than demands. Demands may come later, but in order for them to be credible, they must reflect an understanding of the reality of how people create value in their organizations.
One last question. I know the reader’s note doesn’t give us all the information we’d like, but are there some parting words you can offer?
[Bares] The reader asked a very good and interesting question.
To sum up, one part of the response to this reader is to help them understand that the paradigm has shifted. I don’t know what her company’s philosophy is on paying people but, as a general rule, you don’t get more money for supervising more people – unless the additional people are part of a change by which you demonstrably deliver greater economic value. It is the latter that is valued and gets rewarded today.
Employee pay is a sensitive subject. The last thing companies want is to mess up employee compensation. But a big part in getting compensation right is educating employees. That allows them to have realistic expectations and ask good questions.
Image captured by Sharlyn Lauby exploring the streets of Havana, Cuba2