That’s why I decided this needed a Top 10 list. Here are some common reasons why pay programs fail. These are not a specific policy or program, they are systemic.
We’ll start with the three I’s, which can apply to anyone on the above list.
10. Inequity: Perceived or actual inequities in pay can lead to dissatisfaction and turnover. Have you done a pay equity analysis, and if not why not? Better to understand your risks and figure out how to deal with them than ignore them and hope they go away. Do you know what compression is and do you actively look for it?
9. Inadequate Funding: Insufficient budget allocation can prevent the pay program from being effective. This is especially problematic when the company tells employees one thing like desired market position but then does not provide the funding to attain it, nor seemingly ever intends to. Been there, seen and felt that. Feels like crap. Sometimes the answer to inadequate funding is actually within your control too, you just need to know how to squeeze more out of what you’ve been allocated.
8. Inflexibility: Pay programs that are not adaptable to changing business needs and market conditions can quickly become outdated. This includes how your pay policies are structured, approvals required and the like. It always amazes me that a company that gives a manager a $10,000 purchase authority would require the same manager to get three management approvals for a $500 spot award.
Now moving along to your managers…
7. Lack of Management Support: If management does not support the pay program, it is unlikely to succeed. Your employees will most often see this within their own department when the topic of pay and rewards is discussed. Managing pay seems like such a burden to many managers – after all, they have their manager job to do. Wait – why wouldn’t managing pay for their employees be something a manager would be expected to do?
6. Lack of Training: Without proper training, those responsible for administering the pay program may not be able to do so effectively. And who are the primary administrators? Your managers. Train them every year, they need reinforcement.
5. Poor Communication: Employees need to understand how the pay program works and how it benefits them. Lack of communication can lead to confusion and dissatisfaction. Consider the investment most companies make in pay and rewards and consider the expected return in productivity and performance. Why leave it to chance that employees do not understand something so important? Studies have shown since the Dark Ages that their manager is the #1 source that employees want to hear from when it comes to pay.
And finally, the Top 4 reasons, mostly in the lap of executives, the CHRO and your total rewards leader:
4. Lack of Clear Objectives: Without clear goals and objectives, pay programs can become unfocused and ineffective. Most pay programs are designed under broad objectives like attract, retain, and motivate employees, but may break down if those objectives don’t show their faces when the actual pay range, bonus plan or promotion is applied.
3. Complexity: Overly complex pay programs can be difficult to administer and understand, leading to errors and frustration. There is a definite balance between complex pay programs that are supposed to check a dozen boxes and those that have two or three specific objectives that everyone understands and pulls for in the same direction. The question of complexity is something that should be addressed as part of your pay philosophy. Another adage I believe in – that I made up – is that a pay program should be a “non-event” in most cases. That does not mean exceptional performance isn’t celebrated, but flawless execution is important, but less likely with higher complexity.
2. Failure to Monitor and Adjust: Pay programs need to be regularly reviewed and adjusted to ensure they remain effective. Your business strategies drive your HR strategies, and compensation is a part of your HR strategy. For example, do you grow or buy talent? Could that change when an innovative technology comes along like AI? The majority of AI talent these days is not grown, it’s bought – there’s your answer.
1. Misalignment with Strategy: Pay programs that are not aligned with the overall business strategy are unlikely to support the organization's goals. And let’s not forget the HR strategy at this spot on the list. Do you have a compensation philosophy and pay strategy? How would you know if your pay programs meet their objectives if you don’t? I’m not pointing fingers here. But I can offer a starting point to start winnowing the list. Consider a Compensation Audit from Alliance Compensation. The benefits of an independent outside review can include:
- Identifying any discrepancies or inequalities among individuals performing similar work. Having fair and equitable pay practices promotes retention, as employees perceive that pay decisions are made fairly and without bias.
- Making sure that compensation aligns with the organization’s overall strategy and culture. Compensation is not just about numbers; it should reflect a company’s values and priorities.
- Ensuring compliance with labor laws and regulations. Identifying any potential legal risks related to pay practices, allowing them to be addressed proactively.
- Contributing to the path for an improved employee value proposition.
Does anything on this list resonate with you as something that could improve your pay program effectiveness, employee engagement or position HR more strategically? Let me know.
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Jim Harvey is Managing Partner with Alliance Compensation, and lives with his wife and three dogs in Sherwood, OR. Alliance is a team of seasoned compensation consultants and a trusted solution for public and private clients across the US. Jim has over 40 years of experience in corporate leadership roles and compensation consulting.
