New salary approaches are coming into use. Three of these have become quite fashionable, they concern the chance to choose your own salary, pay transparency and the introduction of compensation-related objectives. Are these innovations really interesting? In this article, we will be taking a very close look at the conditions and limitations of these new practices.
Freedom to choose your own salary
The freedom to choose your own salary has become a popular practice at the moment; an increasing number of businesses are using it to motivate their employees. But does this freedom actually involve limitations?
The conditions for choosing your own salary: the ability to self-assess and know your place in relation to others
In an ideal world every employee should be free to set their own salary in a balanced and fair way. But to do this, the employee would need to be able to assess themselves and evaluate their value to the company with total honesty. They must be able to evaluate objectively what they bring to the company in financial and human terms. This implies a certain distance in how they see themselves, a high level of maturity and a lot of objectivity.
To be able to set their own salary in total freedom, an employee must also be able to compare themselves honestly to those of their colleagues with similar career backgrounds. They must be able to know their place within the company in terms of their own performances. Such an approach can only be possible within a company that is open, has a benevolent management structure and where everyone involved is totally reasonable. It has to be said that relatively few companies actually meet these criteria.
Allowing employees to set their own salaries is encouraging them to take pointless risks
Inviting an employee to set their own salary forces them to consider factors that are very difficult for anyone to evaluate. This is why people who are able to provide a balanced and justified evaluation of the salary they truly deserve are relatively rare.
The risk is that the employee will overestimate themselves and the salary they ask for will be too high compared to what they actually bring to the company and the value they generate for it. But employees that are very pessimistic will underestimate the wage they deserve.
Providing such a high degree of freedom to someone unable to correctly evaluate their value could lead to unfair wage practices and generate inequalities in the workplace. This is why it is important to have a moderator able to estimate the value of each individual.
Another risk with providing the freedom to choose your own salary is that it would put the employee under a lot of pressure which would have a negative effect on their performance. If it is they who decide how much they will be paid, they will unavoidably feel indebted to the company. So they will feel constantly under pressure to prove that their estimation of their value to the company is fully justified.
Choosing your salary, a freedom that already exists
Inviting employees to set their own wages does not really make much sense. And in reality, future employees already negotiate their salaries during their job interviews. They have to know their place in the employment market to justify the salary they consider most suited.
There are always prerequisites involved in choosing your own salary and the employment market provides the most important benchmarks against which individuals can estimate their salary requirements. In this way the employee’s career and experience can be taken into consideration. In this way a professional already knows what they are and can negotiate a slightly higher wage demand without being unreasonable.
Good practices: write your own job description and select your own performance indicators
Whilst allowing employees to choose their salaries is not a truly viable option, there are some other, more intelligent, practices that deserve to be used more widely. The first of these would be to allow employees to write their own job descriptions. The employee will thus become more committed to the company. The responsibility of writing their own job description inevitably pushes them to try to understand how they generate value for their company and consider exactly how they are involved in its function.
Allowing employees to select their own performance indicators would also be intelligent. These performance indicators could then be evaluated by the manager and used as a factor in the calculation of incentive compensation. Again, this would both make sense and strengthen employee commitment.
Pay transparency
Pay transparency is another innovation employees are calling out for. But is it really a vector for fair wage policies.
The risk of an unfair judgement
Just like the freedom to choose your own salary, pay transparency requires the employee to be objective in how they evaluate their own performances as well as those of their colleagues. One thing that gets in the way of pay transparency is that a lot of employees have a rather unrealistic idea of their true value. A lot of people tend to evaluate their value in terms of the time they give to the company. Conversely, very few people try to consider the true value of the time that they spend at work.
And that is one of the key problems with pay transparency. The value generated by employees is calculated differently since performance and investment can differ significantly even between employees with the same job. Differences in pay are most often justified by differences in professional experience, skills and personal investment.
And comparing salaries is only useful if each employee is aware of their own productivity. They need to be honest about their relation to the company and have a vision of their colleagues’ work and value.
Wage differences can be perfectly justifiable but difficult to explain.
For pay transparency to make sense, we would need to be able to explain the real nature of the differences that might exist. Some of these differences are justifiable even less than should be necessary. For example, two small business employees in similar positions could have salaries that vary by as much 20% whilst the difference in their productivity might be the double. And in larger businesses a 20% difference in pay might reflect even greater performance differentials. But it is not always easy to speak openly about these differences when less well-paid employees demand explanations.
Market fluctuations can lead to another type of justifiable wage difference. It is not unusual to see new arrivals get higher wages than those employees that have been with the company for a while. This paradox can be explained by market tensions: when it is harder to attract certain talents, wage propositions need to be higher.
These market variations can be very difficult to explain to the other employees. And it is not economically viable to compensate for these differences by bringing all wages into line whenever the employment market imposes this.
Dangers for both employees and company
To tell the truth, pay transparency involves a number of risks. First of all, as we have seen, the difficulties that managers will face when they have to explain differences in pay; they may be fully justifiable but remain totally incomprehensible to staff. This can create tensions and misunderstandings which will have serious negative effects on relations between the company and its staff.
And being aware of colleagues’ salaries will do nothing more than generate envy and unhealthy competitive attitudes amongst staff. The resulting frustration will bring nothing positive and it will certainly not encourage staff to commit themselves further to the company.
And those new arrivals who have received higher pay packages because of market tensions may be tempted to try other companies and make the most of the competition for talent on the job market. This kind of situation will lead to imbalances within the company and have a negative effect on employee careers.
No need for transparency with a sound wage policy
When pay differences are not justified, this means that, on a number of different levels, the company is not doing its job. You do not need pay transparency to show up human resource management weaknesses. These failures always come to light sooner or later.
Transparency is often put forwards as a way to remove unjustified pay inequalities. But the real solution for that is to simply apply an appropriate and effective HR wage policy. Such policies must be able to adapt to individual employee capacities whilst also compensating staff in proportion to the value that they generate for the company. They must be fair and correspond to the individual profiles of each employee.
In this way pay differences will always exist but will be perfectly in keeping with employee productivity. But if the company has a sound human resource policy employees will be able to realise for themselves that their pay packages are coherent. As for transparency, it is a nice idea that is in fact very difficult to implement and can in no way be a substitute for sound company policy.
Compensation-related objectives
“More and more people have [objectives], from the very top to the bottom” Fabien Lucron, Primeum’s Development Manager and expert in incentive compensation, Le Parisien.
Incentive compensation used to be restricted only to sales teams but is now being applied to employees across the board. This compensation system is based on the achievement of set objectives and places genuine value on the work completed by each individual.
A healthy way to boost motivation
Total honesty between manager and employee is a prerequisite for the introduction of an objective-based compensation plan. Right from the start, the company and the employee must be able to set clear objectives and decide on how the compensation will be awarded if they succeed. These objectives have to be realistic and concrete. For example, we can expect an accountant to stay within a specific margin of error or that a marketer reaches a specific number of new contacts on the company web-site.
Compensation advantages
The advantage with this incentive compensation share is that it is easy to adjust. It can be applied to a specific period: quarterly, monthly or other. It must also be reasonable and not be more than 30% of the total salary, generally equivalent to a month’s salary.
The compensation share also has the advantage of being flexible. It is very easy to raise the amount; which is a lot more difficult for the fixed part of a salary, which must involve mandatory negotiations with the company.
Guarantees for employees
The introduction of objectives into the wage scheme is essentially non-contractual. And this means that all that needs to be done is to propose a simple contract amendment stipulating the new rules to the existing staff. The implementation of an incentive compensation plan can in no way reduce the fixed share of the salary. These rules will reassure employees, new and old alike, and stimulate commitment to the company.
Implementing the freedom to choose your own salary and pay transparency requires the presence of very specific conditions within the company. These innovations are bound to fail unless there is effective communication in place between all involved along with a very high degree of benevolence and honesty. On the other hand, the introduction of objectives is a useful practice which will not impact fixed salaries and also boost employee motivation. And if it is combined with a suitable human resource policy it will increase staff implication immeasurably.
