The End of Experience-Based Compensation Models

by David Creelman | Posted | Total Rewards

The End of Experience-Based Compensation Models

One of the most anxiety-inducing statements about reward comes from Netflix. They write: “Adequate performance will get you a generous severance.” This isn’t meant to be heartless in any way, just the opposite in fact. Netflix levels with employees; they are in a fast moving, high-risk industry and they need people who perform at a very high level. 

There is no room in this business model for “adequate” employees, nor is there room for people whose skill set doesn’t exactly fit current needs. Netflix goes out of its way to treat departing employees well, but there are no passengers on the boat.

In many ways it is like having a professional hockey team. Adequate NHL players who have contributed well in years past are not kept out of loyalty; they are quickly shown the door. Similarly if you are a good goalie and the team finds a better goalie you are out of a job. The NHL is all about pay for skills, not experience or tenure.

Taking a look at your organization's compensation model

Contrast your HR policies to Netflix or the NHL. If you are like most firms you have a system where adequate performance slowly moves you up in your pay grade to reflect increased experience. The question you need to answer is to what extent does a “pay for experience” system put salary dollars where they do the most good?

Some technology firms find that the market rate for skills varies considerably over time as new skills become hot and other skills lose their value. It’s like they say in the music business, “You are only as good as your last record.”  In many ways these firms would like to negotiate pay based on what an employee’s market value happens to be this year; and that pay level could go up or it could go down.

The fundamental issue with pay systems

So here is the fundamental issue. In some businesses, like professional sports and technology, the market value of an individual depends on their skills and that can be quite different than the value a traditional compensation system would give them. In other industries an employee’s value generally does correlate with experience and the year after year increments (adjusted for performance) makes a lot of sense.

One question is whether your pay system is aligned with the business reality? The other question is do you dare change a system where pay for experience is considered a foundation for fairness?

Finding the right compensation model for your organization

The first step is to be aware that the pay for experience model does not always make sense. You need to look out for parts of the business where the misalignment between your pay and market pay is creating problems. It is easy to notice cases where you cannot attract the right talent because your pay policy is out of whack. It is easy to ignore cases where experienced people are overpaid, but it is your job as a reward professional to ask these questions.

I probably don’t need to explain that it is painfully difficult to take action on people who are overpaid. Think about this pain for a minute and it will motivate you to consider if you can restructure your reward system so that this over-payment doesn’t occur.

If you are Netflix or the NHL you build the whole system around pay for the value of the employee’s skills today. For other firms an easier solution is to push whole categories of work to some sort of non-employment relation: for example using contractors, an outsourcer, or a talent platform like Topcoder, Tongal or Elance-oDesk to facilitate work done by free agents.  Another option is to have one compensation system for part of the company and a different system for another part; this is exactly what the CME Group (Chicago Mercantile Exchange) did when it moved into a new type of business that required much higher variable pay than it had traditionally paid.

Where are we heading?

The world may be becoming more NHL like. If you have 15 years of experience in TV advertising then you may well be less valuable than someone with 2 years of experience in Internet advertising.  If the half-life of knowledge is getting shorter, then the value of experience is probably getting lower as well. Ultimately the reward system you are responsible for is going to have to reflect that reality.  Moving up the pay range based on experience is a fundamental assumption of most reward systems; we need to face the uncomfortable fact that reality is challenging that assumption.

Note: To read more about Talent Platforms check out my new book Lead the Work: Navigating a World Beyond Employment, co-authored with John Boudreau and Ravin JesuthasanTo read about the CME case, check out chapter 2 in Transformative HR. To talk about it, connect with me on LinkedIn or shoot me an email at dcreelman@creelmanresearch.com.

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