Not least because the cost of replacement was significant. New candidates were far more expensive than the leavers. They were on long notice periods and were not prepared to join a pay and reward system that ignored market value and personal performance.
What did the company do? Well, it first had to recognise the problem and acknowledge there was an issue. This was difficult and involved all sorts of discussions, which inevitably became wide ranging in their scope. Everything from company culture to extra benefits. All important elements that we’ll return to, but the truth is unless you get to the central issue, adding free beer and a staff discount isn’t going to cut it.
New candidates of quality are usually confidently aware of their negotiating position.
“Look, this is a really important decision for me. The job seems perfect and I know I’ll make a great contribution. From what I’ve seen it’s a brilliant culture and the possibilities to advance are really going to motivate me. But the basic package is less than I currently earn and to be honest I’m looking for a step up. I’ve had many approaches with more money, which I’ve said no to because the position wasn’t quite right. This is the job I’d love but I need another 20% on what you’re offering.”
So say many candidates in a variety of different ways. Of course, they wanted at least market rate or above and that meant the company’s fixed-tiered system would be broken, providing that a different set of pay rules, just for new people, could be put in place. Or the company could employ lesser people for less money, hardly a good idea if you’re trying to grow a business, which I assume you are.
Government-sponsored organisations are typical of rigid, inflexible thinking on pay and reward. Levels, tiers and bands are commonly used to fix remuneration, inevitably geared to treasury budgets. These provide the foundation for an increasingly dissatisfied workforce until only the committed, desperate and challenged candidates take the jobs. Then there’ll be public outcry about the quality of teachers, the lack of nurses and the politicians will blame the previous regime and put in place a catch-up pay plan and recruitment drive. Then the whole sorry, sad cycle will start again to be repeated a few years down the line.
It’s so short-term and damaging. Recruiting people into many industries takes years. You can’t train a doctor on a three-month course at the local Travelodge. If you make entire sectors unattractive, the recovery period stretches out over the years. Crazy. As we know to our cost, those that ignore history tend to repeat it, as the saying goes.
Another example of an extreme system, which I also don’t advocate, is that normally attributed to bankers. The annual bonus. This method of reward is prevalent in many, many industries outside of finance. It’s just that bankers, for a number of very well-trodden reasons, are singled out to take the media hit.
Mostly, annual bonuses appear to be part of an opaque system that has little apparent relationship to performance or productivity. That’s why they’re seen as a problem. Existing only because everybody else has them, so as to be competitive. “We need them too. It doesn’t mean we like them!” Where’s the courage in that?
In the world of work, everyone has their calling. And those arguments of why nurses (I’m married to one) are at the bottom of the pay scale, taking account of the demands of an absolutely necessary service, compared to bankers, are largely meaningless. Bankers become bankers because they want to make money. Nurses are nurses for very different reasons. And to be fair, if we don’t create wealth and generate taxes, we wouldn’t be able to pay anyone in free health care. What they both share are pay and reward systems that are not fit for purpose and we, outside of these extremes, can learn and apply more successful strategies and models.
As business people we remain, mostly, only tied to the norms of the market and the expectations of our people, present and future. Within the financial constraints of our company, we enjoy complete discretion on how we decide to pay those around us.
Everything should be at our disposal, and an open-minded approach can benefit everyone involved. On the one hand, we have the ability to pay according to hours worked and can employ a flexible workforce according to demand. Only paying staff when you need them is a useful variable cost, geared to the direct immediate needs of the business.
This needs careful thought and management, as the downside for the worker is they never know what they’ll earn that week – not helpful for planning outgoings and paying the bills. Being fair and responsible with this style of reward is about ensuring a good reputation, which will help attract talented people. You don’t want to be the employer of last resort.
“I’m only working here until I can find something else. For what they pay I’m almost better off on benefits.” People saying things like this at the bottom end of the pay scale will have an impact all the way to the top and probably into the media. Not what you want, as that will affect recruitment and morale at all levels.
At the other end of the scale, the average pay package of a FTSE or Fortune 100 chief executive runs into millions. And it appears that all too often there is only a tenuous link to performance. Profits and share price slide in the wrong direction, but salaries in the senior executive suite have been growing for largely inexplicable reasons.
The worst case is exploited workers at one end and the clichéd fat cats at the other. Millions of words have been written on the subject and it’s not my intention to add further to the volumes of criticism. But I would like to look at a few common issues and offer some advice, which in my experience has every chance of working. It works for me and the companies I’m involved in.
First, be honest about what sort of company you’re running. Are you the type of company where people say, “trouble is, they don’t pay very well”? If attracting great people is part of your plan, then that’s a reputation you can do without. If you’re a company that’s known for paying well and respecting your colleagues, in my view that’s attractive. Particularly in a competitive recruitment market.
Base salary is the driver for other benefits, the most important of which is a pension (if you provide one), followed by incentive schemes and performance-related pay. If you don’t keep up with market rates, you fall into the trap of paying new hires at better rates than your loyal incumbents. Who, if you’re not careful, will soon work out that the only way to get a pay rise is to leave. Recognising that good people are hard to find, don’t lose the ones you have already.
Avoid blanket pay rises because you’ll inevitably be rewarding people as if they all perform at the same level of productivity. And they most certainly don’t. Use the under-performers’ allocation to hit above the market benchmark for the key achievers. In virtually every company, pay increases are discretionary. Yet too often someone on the wrong end of a difficult appraisal still benefits from the company increase. It is remarkable how often someone in the firing line for underperformance still gets paid more.
“Why do you think I should leave? You just gave me a pay rise!”
The much trickier areas to get right are bonuses, incentives and discretionary rewards. If you’re not careful, these can be counterproductive and, in the worst instances, divisive. On the other hand, performance-related pay (PRP) can improve productivity. Some time ago I was a director of a business where we scrapped annual discretionary bonuses for PRP. It made a really important, positive difference.
With discretionary bonuses, no one really knew what they had to do to get paid out. At the end of the year (far too long) they’d be given their number, which mostly disappointed. Their expectations hadn’t been managed and had got out of hand. Furthermore, they suspected that others had done better than them. My experience has taught me these pooled bonus schemes are mostly useless and not fit for purpose.
I worked at a company which was mostly owned by the founder. The remuneration meeting decisions were mostly based on their personal experience of meeting staff in