Compensation as a Filtering Tool
Instead of using the tool, many allow the tool to use them by having financial & mental security, lifestyle, sense of worth, social status and many other factors be tied to compensation.
Given how weirdly intertwined compensation is to our lives, it makes it a difficult topic for many organizations and people.
One particular view I wanted to examine in this essay is using compensation as a filtering tool for both employees and employers.
Compensation as a Hygiene Factor.
In his book, How to Measure Your Life, the late Clayton Christensen references Frederick Herzberg in discerning that compensation is a ‘hygiene factors’ as such:
“…there are the elements of work that, if not done right, will cause us to be dissatisfied. These are called hygiene factors. Hygiene factors are things like status, compensation, job security, work conditions, company policies and supervisory practices….Bad hygiene causes dissatisfaction, You have to address and fix bad hygiene to ensure that you are not dissatisfied in your work…. The opposite of job dissatisfaction isn’t job satisfaction, but rather an absence of job dissatisfaction.”
Hence, one should never think of ‘winning’ with compensation. At best, it won’t stink.
There rarely will be a person who says “You are paying me too much. I can’t accept it.” If they exist, sooner or later, they will compare themselves to someone who makes more. This may set a new benchmark that puts them into the majority group of people that fit in the camp of “I should be paid more”.
Commonly, when all things are ‘equal’, it’s common for folks to hop between large organizations who are competitors and take the higher compensation (i.e. engineers hopping between Google and Microsoft or accountants hoping between Deloitte and KPMG). Sometimes, things like colleagues or career trajectory come into play but even promotions get welded nicely into compensation packages. Titles, thus can be considered akin to compensation.
It’s one of those things you want to be ‘fine’ with. It won’t be what makes or breaks a job. If it is, then there is a bigger problem. It means, for you and the employer, you are not the right candidate in the long run.
Let me caveat this viewpoint by stating that I believe this to be the case for companies reliant on the creativity of its knowledge workers. Companies that operate on the final frontier of human capability that will be extremely difficult to automate.
Evolution of Compensation
If I looked at the root element of compensation (i.e. the money), it is a means of barter and exchange.
“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”
But, the compensation that forms how we earn money has taken a greater definition than fuel to live (i.e. buying food and shelter). Instead, it has taken on a mental enhancement of living.
For some, it becomes the security blanket one uses to justify one’s decisions in life as well. Whatever you did in the past.. whether it be failures or successes.. you say the compensation is worth it and is the result of it.
For some, it’s a sign of social status to be earning more than peers in a tribe. It becomes the yardstick to measure yourself between your peers at work or to measure your success when you go to that high school reunion.
For some, it’s a means to purchase other means of displaying status. It’s such compensation that can result in the fancy sports car or the table you buy out in the club. The main purpose for such signals being to make one appear attractive as a mate.
For some, the compensation leads to a higher title associated with power and this may be how they equate their own ‘success’. Sometimes you blurt out the title and people assume a high compensation, and sometimes its the compensation and they assume its an equally top title.
There are many computations but one thing for certain is that compensation has become more than just ‘earning fuel’ for many individuals.
This evolution may have been inevitable given the evolution of how people had to allocate time from 80% of time being allocated to earn wages to survive in the feudal periods to what is now about 30%.
Thanks to technology we will see a world that will progressively move towards the eradication of blue collar jobs and more white collar jobs (i.e. knowledge work). I think this has led to using compensation for something other than food/shelter and it has started to take on more in our lives as a means to spend the rest of the time not spent at ‘work’.
Compensation as a Tool.
All in all, this has been a long way of me trying to paint a picture from my mind on how compensation has evolved in society and our individual minds.
I do believe that I may have painted a picture that doesn’t put the evolution of compensation in a positive light. But like all tools, it can be extremely helpful for us if used properly instead of letting the tool control us… just like your phone.
As such, I see compensation as a valuable tool that can be used by both the employee and employer to filter for what is truly important.
Filter for You.
You and I’ve all heard it and maybe even said it from our lips before: “I’d stay if they paid me more” or “I wouldn’t mind it as much if they just paid me more”.
I’ve seen colleagues bring offers from competitors to negotiate raises at their current firm or jump around to the next highest bidder repeatedly.
But doesn’t such behaviour beg the question of whether one should even be in this profession? If you are only doing this purely for a higher paycheque.. then why do this at all? Because there will come a moment when someone will not pay you anymore. The reality is that you will probably not be able to compete with the person who actually loves what they do. The person for whom compensation is not a motivator. It’s one of the oldest stories in careers out there.
As hard as it might be to accept, one way an employee can use compensation as a filter is to filter out things you’d only do for money and things you’d do even if money didn’t form the material result of the equation.
Most employees use compensation as a filter to select the company. As in, using it as a metric to see whether the company “values” them properly or whether the company is “successful” based on their ability to pay exorbitant salaries.
Some may take it a step further to filter for what the compensation incentivizes are to get an understanding of what the company actually values. Such analysis of the company through compensation is indeed important. It’s one factor that can be used to assess whether the organization is “walking the talk”.
But I think all that kind of external company analysis becomes moot without using compensation as a filter to analyze what it is you actually value. It’s this way that compensation can actually become the tool to filter out for factors that actually matter to you. How you wish to be incentivized, what you care about etc…
It maybe that you do not care for a lavish lifestyle but you need a certain level of compensation because you have aspirations to start a company. But upon further examination you may realize that you need more than just a higher compensation but a certain title to build trust with future investors or to attract future talent… you might realize that you can start your company while being an employee and you can live on very little as long as you can have complete freedom of time and location. All these will continue to be factors in filtering using compensation.
Filter for the Company.
Same goes for the employer.
Are you in the business of purely hiring for mercenaries who just want to get paid or are you trying to invest in people that will perform for you in the good times but also find innovative ways to help the company succeed in the bad? What I’ve seen from my friends who go for the money/title combo is that they will leave you as soon as they smell blood in the operations.
If pay becomes the ‘make it or break it’ factor (a hygiene factor), then we know it will only serve as a short-term solution the ’music stops’ and/or until they learn someone else gets paid more and eventually leave. It’s really a losing battle for the employer to be competitive on compensation alone.
Referring to Daniel Pink’s book, Drive, knowledge workers want to be paid fair and want to feel safe so they can focus on their work. That’s what compensation should really amount to. What kind of ‘fair’ is good enough… well that’s where the filtering will come through.
What you set out as “fair” can help filter for the characteristic of the future employees. Do you want to hire someone who needs a high compensation to sustain their lavish lifestyle? Do you want those who prefer experiences over tangible status symbols? Do you want to hire for pragmatic individuals? Do you want to hire people whose self-esteem is so low they are fine with being underpaid?
How you change the structure of incentives can filter people out too. Instead of having most be a set salary… what if majority of the compensation was predicated on quarterly or annual payouts from the profit generated by the company? There are large conglomerates like Semco or small investment banks like Infor who have implemented such quarterly payout structures.
Wouldn’t that align incentives so people actually feel like they are earning their keep by building up the organization? So that it’s not just the owner but you foster the ‘owner-mentality’ with all employees?
If you had such a system, you may attract people who want to have the company’s results directly impact their own earnings. This is in comparison to people who don’t want the risk and who don’t want to have their lives actually tied to the company.
This could filter out the long-term minded people who actually want to help the company from the short term minded ones.
All these are factors to consider when you think about being “fair in pay”. The characters you bring in will shape the culture of the organization and the compensation you offer will pull in characters who value those incentive schemes. So much can be filtered out with compensation.
But that also means that compensation forms a material component of the full employment equation. What if it became a smaller component in lieu of other factors?
Compensation as a part of the picture.
What if money alone doesn’t become the road block?
In most cases, what people want out of retirement is to have freedom to do what they want, where they want and when they want.
Much can be achieved if the employer just abolishes archaic and impractical systems like set working hours. Just the freedom, true freedom, of time alone can allow employees to pursue ventures like slowly building a company on their own time or pursue various passion projects. Most knowledge workers are only truly effective for about 20 hours of the week anyway.
If the employee values living in other places or need the higher compensation because the city they live in has become too costly… then make the company remote. Create options to make compensation less of a factor.
When you create such systems, it makes compensation a form of filtering where you will then attract people who will place a greater value on the freedom of time, location, and direction compared to just pure $$s.
It can also filter people out so you don’t have to necessarily fire them as most will probably just leave because it doesn’t match what they want.
Such compensation can be a filtering system in the beginning to increase the chance of the employment becoming successful. Not saying it will be. But such ‘barriers’ help set a situation where only those who don’t see it as a barrier or see it as something they truly value will make the effort of overcoming.
The more rigid and upfront you are with your system the clearer you can filter for the behaviour you wish for. Framework of how others do it are only going to achieve subpar results.
There is no ‘complete solution’. The employer and employee will need to continuously iterate to see if their hypothesis is right.
What’s important is considering using compensation as the tool it is to filter opportunities to build something for the long term. Whether it be an individual’s career or an organization.