Tuesday, February 5, 2008

Why is he making more than me?

As much as employers try to conceal the compensation that each employee receives and as much as the rules of etiquette dictate that we shouldn’t poke around to find out how much our peers are making we are all curious to know and it is a justified curiosity that sooner or later will result into some employees getting hold of such information. In a perfect World the fact that some employees (or even all) know how much their peers are making should have no bearing on your organization but chances are high that the compensation has gradually gotten out of whack and assuming that is the case, such information will have a powerful deteriorating effect on the moral of the employees and consequently on the productivity of the organization.

How does the compensation get out of whack?

There are many factors that contribute in creating an unbalanced unfair compensation structure in an organization. Here are a few obvious ones:

  • Organizations do not keep up with the market therefore the compensation of the employees hired at different points in time may vary widely despite the similar qualifications, experience and the work they do. Example: the regular raises have not kept up with the market – in other words if you hired a programmer in year X when the average going rate for a rookie programmer with a CS degree was $45K / year and increased his/her compensation by 3% every year – after 3 years his compensation will be just above $49K. Let’s say that in the meantime the market conditions have pushed the average going rate to $55K. Now a new rookie with no experience starts at $55K … A rational mind would argue that the market will take care of such discrepancies as the employee that is stuck at a lower pay grade will leave the company and will find a new job at the going market rate! Well, not quite - there are many factors that make it very hard if not impossible for an employee to simply jump ship and go climb aboard another ship.
  • Ability of the employee to negotiate / sell himself – again, a rational mind would argue that unless you are applying for a sales or management type position your selling and negotiating abilities should have no effect in your compensation since you will not be “producing” any more or better than your peers. However the reality does not follow the rational – the fact is that your compensation depends heavily on your ability to sell yourself and negotiate. The effect can sometimes be that you end up with a charismatic programmer that is making significantly more than his peers that may be better and harder working programmers than he is! The humble shy programmer on that corner cubicle may not say a word but he will definitely be unhappy and start questioning his loyalty towards the organization when he learns of such injustice.
  • New managers – a new manager customarily brings on board new people some of whom are possibly his/ her old acquaintances and often agrees to compensate them at levels above those of their peers…

How can a manager tell if the compensation for his department needs to be adjusted?

There is a quick and easy “test” you as a manager can do: just imagine for a moment that you have to get all your direct reports on a room and disclose to them all the details of the compensation of each one of them. Would you feel comfortable doing that? If not then there are two possible explanations:

  • You are not compensating them fairly; OR/AND
  • There is a gap between your perception and your employees’ perceptions of the value they bring to the organization and you are aware of that discrepancy and that is the cause of you feeling uncomfortable with such potential disclosure.

The latter is the easy case – don’t let the time go by, talk to your employees and make sure your perceptions are aligned – an open, honest conversation will go a long way towards avoiding issues that may arise from disclosure of compensation information.

If you are not compensating them fairly then you need to take action – devise the adjustments you need to make and don’t wait for the next performance review to let your employee know – even if you have to wait to implement the changes when the next budget is approved you can sit down now with each and every one of your direct reports that will be affected and let them know how your plan will affect them. That will show them that you care; that they have not been forgotten, that they matter to you and the organization; that they don’t have to struggle thinking of how to bring up the compensation issue as you have taken the initiative to bring it up and instead they can focus on doing their job to the best of their ability confident that they are not being taken advantage of… The results you will get from those simple actions will be nothing short of outstanding!

Keep in mind though that the above test works only in one direction – in other words, if you wouldn’t be comfortable then you know for sure that something is wrong but being comfortable does not guarantee that everything is ok. It may simply be that you have a perfect compensation structure but it may also be that you are out of touch with reality and you don’t realize the need for action. To determine whether everything is ok or that you are out of touch with reality you can conduct a simple truly anonymous survey to get a feel of what the perception of your employees is. Such survey can contain a few questions like:

  • are you happy with your compensation;
  • do you think you are being compensated fairly compared to peers within our organization;
  • do you think you are being compensated fairly compared to peers across the industry;
  • etc

To ensure that you will get true answers I would strongly suggest utilizing a third party to conduct the survey. It is also very critical that the survey be designed professionally to avoid manipulative answers (just one of the pitfalls of such surveys) – example: an unprofessional survey may inadvertently create the impression that the intention of the survey is to justify an increase in the compensation of your employees in which case they will do the best they can to “help” you get your justification! What you will get is a worthless survey that does not tell you anything more than the natural desire of everyone to make more money. Furthermore you would have wasted your time and their time while planting the seeds of unhappiness within your team – they will be disappointed when they see that you simply trashed the survey results.

A professionally designed and conducted survey will provide invaluable insight that will help you tremendously in making the right decisions and building a great team.

Well, this is not meant to be an exhaustive paper on the subject – I have barely scratched the surface and I see that it is already too long a read so I am stopping right here.

Please feel free to leave your comments and suggestions on the subject.

1 comment:

Anupam said...

A very good article indeed. It's a never ending argument and quite subjective too. Most of the employee in this world believes they are under paid. Have you ever met any one saying, I am over paid? If Mr./Miss. X is complaining about his/her salary comparing against Mr./Miss. Y, I would prefer to tell X to shut up and mind his/her own work! I know that you are going to term me as the worst manager in this world.

This is my principle – if I believe that I am under paid, I will make my manager aware of the fact and wait for the next annual review. If thing doesn’t change in next year, I will post my resume in Monster/Dice during the next weekend. If I don’t get a job in next couple of month [Worst case 4 months, If I am too picky], I will ask my manager to reduce my salary by 10% and will kick my own ass. You understand what I am saying?

Thanks