26 February 2009

Pinto's point

Outdated compensation mechanisms

By Jim Pinto

In the age of knowledge work, outsourcing, and global competition, quite a few companies still have employee compensation systems rooted in the past. In today's business environment, pay must be performance based.

Most of today's employee compensation mechanisms originally started in the factory environment, stemming from how hourly workers were paid in a labor-orientated hierarchy. Having a job meant a fixed hourly wage (usually including paid-overtime for working beyond normal hours) with annual pay increases based on years of service, the occasional bonus, and an expectation of lifetime employment.

In a new knowledge-based business environment, many companies still cling to the same, archaic systems with set pay-ranges, periodic reviews, and almost automatic pay increases. Resentment develops when compensation does not increase, at the very least to keep up with the cost of living. With regular pay increases, employees who've had years of service tend to get comfortable and overpaid for what they are doing.

Of course, when times are tough, it is evident mediocre people who have been around for a long time are paid too highly, especially when compared to new hires or outsourcing alternatives. So, when cutbacks occur, highly-paid long-term workers are often the first to be let go.

In the old days of factory workers, labor unions formed for collective bargaining over wages, benefits, and working conditions. Today, work can easily be outsourced to offshore locations with much lower labor rates, and unions have much less bargaining power.

The best knowledge-workers cannot just be paid for the hours they work, they may always be "working." They should be stimulated by the freedom to innovate and contribute to the business. That is the wave of the future. This is what is revolutionizing human-resource attitudes in this new century. In the era of knowledge-work, employee compensation mechanisms should adapt to achieve rewards for those who generate results.

In today's business environment, the best form of compensation is performance-based. This gives people immediate and meaningful feedback. To minimize lack of fairness, employees must be given measurable objectives with goals that they themselves participate in setting.

This brings up the question of ownership. In a capitalistic society, it is important for people at all levels to share in the growth and success of the enterprise. Indeed, this has given rise to the spread of employee ownership plans, stock options, and other forms of participative involvement.

Of course, there is another element of capitalism that eventually kicks in: If you own enough stock, you do not have to work.

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Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto's Points, at www.jimpinto.com/writings/points.html.