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The Four C’s of Compensation Management

Posted on 25 Jan 16 by Tom McKeown

If you are a married man you have probably shopped for a diamond at least once in your life.  During that experience you no doubt received the education from either a jeweler, or female friend, about the four C’s in determining a quality diamond, Clarity, Color, Cut, and Carat.  When it comes to the process of compensation management, there are also four C’s to consider.

Clarity – This is very important when determining the fairness and equitability of raises, bonuses and other incentives. Ideally, everyone who is involved should be able to look clearly into, and most importantly to understand the process.  Whether it is an individual contributor, manager, or executive, they must be able to view the formulas and know exactly how much, both they, and their direct reports will make based on achievement, as quickly and void of extensive calculation as possible. An individual must be able to look at their compensation plan and know that if they produce “X”, they will receive “Y”.

Consistency – This applies both between groups of employees as to their individual compensation packages, and the entire workforce.  If two teams within a company achieve similar quality and market results with their respective product offerings, then certainly any bonus tied to such should be equivalent.  Also, if the company as a whole has a history of giving a 10% bonus to the workforce for 30% revenue growth, even if it is not documented, then arbitrarily changing that in one year can be very de-motivating.  Remember Chevy Chase from a “Christmas Vacation”, saying to his boss after he cuts bonuses, “When people count on bonuses as part of their salary, well what you did just plain #*&#@’s.”

Competitive – There is a rationale for not always paying what is standard in the market for a particular position, or to the workforce as a whole.  Perhaps you are a start-up who compensates with equity instead of cash, or maybe your brand is to give younger or less experienced individuals a chance in jobs they might not be able to get at most other companies.  Whatever the reason is, be aware that market compensation data is very available at company websites such as Payscale and Glassdoor for employees to check their worth. As an employer, you must assume that people know what their peers in the industry are making, and that you risk losing them without the right compensation or justification.

Compensating – I agree this one was a stretch to have start with the letter “C”.  However, what I am trying to get across here is that the primary goal of the whole process, is for compensation to adequately reward performance.  I’m not a big proponent of the peanut butter approach of spreading average raises across the organization and then going up a point for great performance, and down a point for under-performance.   A study by HR expert John Smith at the University of San Francisco determined that above average performers can contribute up to twelve times the production of their average counterparts.  Thus, if you are only giving them one or two percent more in raises, be sure there is someone else out there who will do better.

It’s always great feeling to give something of value.  Whether it be a diamond ring or a compensation solution, the tenure of good will between the parties will definitely be in proportion to the quality of the offering.  So get the best whenever you can.