Double my Salary!

by Don Harkey

Pay is a poor motivator. That needs to be the start of any discussion on how to set compensation for employees. If you pay someone more to do something, they will not do it better, at least not for a sustained period of time. While it is true that most people work "for a living", when a person focuses on external motivational factors (like salary), they tend to feel less motivated.

So how do you set salary or compensation for your employees? This is very tricky and I do not claim any special expertise in this area. However, we can take a step back and think about some things to think about when setting up a pay structure. Note that I am not address legal requirements here... the government has made that far too complex for me!

1) How much should you pay someone?

I see 2 major factors involved in pay; market conditions and fairness. Labor lives in a free market. Compensation varies significantly based on supply and demand. Teachers make relatively low salaries because of the vast supply of teachers. Alchemists can barely make a living because of low demand (although I suppose a good alchemist can be self-employed). The more skills and experience a person has, the more they are worth on the open market. Jay Leno or LeBron James can negotiate high salaries because there aren't many people who can do what they do as well as they do it. This means that when paying someone, you should pay them enough that they can't easily find a better position on the open market.

Fairness factors in depending on the business. If my business is doing incredibly well and it is largely because of a person working for me, I might decide to share the success with that person. On the same spectrum, if my business is doing poorly, I may decide that I need to cut the pay for that person. By "fairness", I am not addressing the fact that fire fighters and teachers do very important jobs for relatively low salaries. The brutal fact is that supply and demand set the "value" for these positions.

2) Should salaries be secret or transparent?

A good friend of mine believes in publishing the salaries of all employees. I like transparency and really haven't thought enough about this to form a strong opinion. I will point out that anything that draws attention to salary is demotivational over the long-term. When an employee gets a raise, they feel valued by their employer and tend to feel more motivated. However, over time, they start to look for the next raise and forget the internal factors that drive and sustain real motivation. I am not saying that you should not give raises. I am saying that drawing attention to salary causes a negative impact on motivation. Transparency would seem to multiply that affect.

3) Should salary be tied to performance?

Yes and no. Yes, salary should be tied to performance in terms of the free market. Managers are easy to find. Great managers are a little harder to find. There is also an internal market factor that ties performance to pay. If a person becomes critical to YOUR organization, then the supply of people that can effectively do their job is very low driving up the employee's value to you.

No, salary should not be directly tied to performance. There have been numerous attempts out there to develop performance evaluations that can be plugged into a formula for determining salary raises. The problem is that when pay is tied to metrics, the metrics become manipulated regardless of who the person is or how complex the metrics are. If I am a project manager and my pay is tied to staying under budget, I will find a way to stay under budget (either at the expense of quality, or by "cooking the books" by shifting project money around or sandbagging). If you want to inspire innovation, set up a performance metric and tie pay to it. You will see some great innovation to drive the metrics!

Those are just a few issues regarding pay. Its a tricky issue because you have to pay people, but as I have said, it really isn't the core of why you want people to want to work (did that make sense?). Ideally, you want people to feel competent, autonomous, and related to the organization as a whole. This is where you see people voluntarily giving up their pay for the good of the organization. This is a higher level of motivation that will stick around through good times and bad!