HR Myths #6: Where Comparative Payscales Come Unstuck

Posted on March 14, 2007 by admin

How do pay scales come about? How do job descriptions get assigned to a pay grade? How do compensation bands get assigned to those pay grades? and how do HR departments decide how much is fair pay to offer a candidate applying for a job? To be mildly unkind, they are thick as thieves with all the other HR folks! They meet usually twice per year to compare pay scales and compensation bands with other companies in the same metropolitan area or industry, and they use salary surveys and other analyst research data to build a map of what compensation levels are appropriate for particular positions. They accumulate mean and median information and spread data that allows them to asses upper quartile, median, and lower quartile pay, and often percentile accuracy.

At a higher level, usually the executive committee, a business decides which percentile or quartile they want to target for their employees. If for example, an executive committee decides that their strategic positioning is as the cost leader in a market, then they might decide as part of that policy that they only want to pay lower quartile salaries. Hence, low cost also means cheap or poor quality staff, presumably leading to poor quality service and products - but at a cheap price.

This would imply that an organization that wants to merely mediocre would instruct its HR department to enforce a policy of say median (or 50th percentile) pay for employees. Congruent, no?

STOP RIGHT THERE!!!

When did you ever meet a strategic planning department that would openly state, "Our goal is to be mediocre!" How motivational do you think that would be? Can you imagine the posters around the office - Master Mediocrity - Strive for Median Performance - Competing is Better than Winning!

And you get my point!

Companies that state, "We want to be no.1 in the [insert subject here] market", "We will dominate the market for [insert product] in [insert geographical region]" and so on, are declaring that they want to be the best. So how do you reconcile that with for example, a recruiting policy of targeting the 60th percentile in an industry?

I like to call the proper alignment of goals with recruitment policy, the Kenny Dalglish School of Management. Dalglish was the most successful football player ever to come out of Scotland. Arguably he has to cede the position as best ever manager to Alex Ferguson, but Dalglish's managerial record is very impressive having won the English league trophy on several occasions and with two different clubs. With the second team, Blackburn Rovers, he took them from the Second Division to the championship in under 5 years and thus proved that he hadn't been lucky the first time around with Liverpool. Dalglish had a simple approach to management. He believed that you had to optimize each part in the system to be the best. So if you wanted to concede the fewest goals in the league, you needed to have the best goalkeeper. If you wanted to score the most goals, you needed the best striker. And so on. He consistently broke transfer records, to sign the best players to his team and deny the competition the use of those players. His actions were aligned with the goals of his employer. Consider this snippet from his Wikipedia page...

1994-95 saw Dalglish again break the transfer record, paying Norwich City £5 million for Chris Sutton who along with Shearer formed a formidable striking partnership. He had now spent £27¾ million putting together a squad that could make a serious challenge for the ultimate prize, the Premier League Championship. The challenge came and by the last game of the season both Blackburn and Man United were pushing for the title, Blackburn had to go to Dalglish's former home Anfield with United having to go to East London to face West Ham United at Upton Park, Dalglish smiled as Rovers went 2-1 down to a late Redknapp winner and the news that United had failed to get the result they needed filtered through to him via the radios in the crowd.

At Blackburn Rovers, club owner Jack Walker wanted to win the championship. He hired Dalglish to make it happen. Walker wanted to be number one. Dalglish hired the best by paying the most and delivered the prize.

Now ask yourself this... Are your employer's strategic positioning and stated goals aligned with the recruitment policy and compensation policy?

Further consider, whether one blanket policy - a one size fits all approach to define the targeted pay band is appropriate? For example, if your employer has a goal to be no.1 in services, but lower costs in widget manufacture because the widget market is coming under price pressure and has been commoditized by competitors, would you have a single policy on recruitment and compensation, or would you tailor those policies according to your strategic plan? Might it be better to have an upper quartile policy for people who can deliver on the goal of being "no. 1 in services" while other areas of the business might rightly have a 3rd quartile policy?

If you know of any businesses that have fine-grained targeted recruitment and compensation policies and have correctly aligned those policies with their strategic positioning, please comment. 

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