Annual Pay Increases – What Is “Fair”?

20150908162833-one-dollar-money-woman-ceo-bossI recently received an e-mail from a client.  They’re in the service industry with about 250 employees and multiple departments, located in the Pacific Northwest.  The COO was frustrated because the board of directors, at the urging of some department heads, wanted to give all employees the exact same percentage raise.

Here’s her question:

Can you reach out and try to explain the downside of across the board raises just because someone lasted another year.  One or two departments are trying this approach and it may undermine the salary and wage plan we are trying to implement with top performers getting more, average performers getting less and non-performers getting zero.

Someone has to be a #1 and someone has be the bottom of each department.

And here’s my response:

One of the first things a business must do is set a compensation standard for the entire organization.  It is counterintuitive to have one department doing one thing and other departments doing another.  It lacks cohesion but more importantly it lessens the overall culture and direction you’re trying to establish for your organization..

So my first recommendation is that it’s one overall compensation and workforce strategy and plan for the entire business.  Successful businesses are run this way; unsuccessful businesses are not.

The second recommendation takes more time.  And it is essentially – should we do across-the-board raises – the same percentage – for everyone or should it be a merit-based program?

The rationale for across-the-board raises is that everyone is treated the same; we’re all one team and, candidly, it’s a lot easier for lazy managers to implement.  There isn’t any complaining, no thought needs to go into it, and we can get it over with.

This was the thought of businesses until the late 1980’s, and it worked until then.  Treating everyone the same created harmony and dis-incentivized weaker performers from complaining to their lawyer, or anyone else around them.  Also there was thought that it increased the “we are all one big team” mentality.

This theory is now widely discredited by forward moving organizations and by leadership thought leaders globally.

We are in an era of “one size fits one”, not “one size fits all”.  Across-the-board raises discourages your top performers and encourages mediocrity among the team.  Businesses are trying to do more with less, and implementing pay-for-performance, or merit pay, is the principal way of accomplishing this.  Progressive organizations identify their top performers then find out what they want and give it to them.  And they weed out poor performers.

A great deal is made of the employment practices in Silicon Valley – Google, Netflix, Yahoo! and all of the others.  We read about flexible workplaces, catered sushi lunches, and free dry cleaning on premises.  But what you don’t see is the expectations associated with all of those perks.  The Netflix Culture Code – a document I recommend to every business owner, CEO and future leader – is a perfect example of this.

Do you know what Netflix’ thinks of mediocre performers?  It’s on page 22 of their code: Adequate Performance gets a Generous Severance Package.  They don’t even pay average performers less than top performers – they get rid of them.  In this way, they maintain their standards of excellence.

I know lots of CEOs who regret keeping marginal performers on too long; I know none of them who regret letting them go too quickly.

So in ‘the real world’ today, poor performers aren’t just paid the same as everyone else – they’re eliminated from the organization!

Merit pay incents top performers; it motivates marginal performers to either improve or find employment elsewhere.  And most importantly it sets a standard that you expect excellent performance at all times.

I would like to find out from the department heads what their compelling reason is to do across-the-board raises.  I’m willing to bet it’s a self-serving reason, from “we’re just one big team” to “I don’t want to create discontent.” That’s yesterday’s thinking and a guarantee that mediocrity will continue.

We talk all the time about eliminating an entitlement mentality and creating a culture of accountability.  How on earth can that take place under a one-size-fits-all mentality?

And the “one team” argument is ludicrous.  Look at professional sports teams.  Do they all get paid the same?  No.  Do they all get the same percentage of raises each year?  No.  Everyone knows who gets paid what, and everyone knows that the best players get the most pay.  That’s the way it works.  And somehow those “teams” still have that “team mentality”.

Focus on moving forward.  Leadership takes courage.  But the drive to be great needs to be self-evident.  Right now, the evidence is that your managers don’t really want to lead.

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The Importance of Your First Job

The first job a person gets is, in many ways, the most important job you’ll ever have.  If – that is – you look upon it as what is should properly be – a learning experience.

Never, ever look down on any work you do thinking it is beneath you or will have no value you to you in life.  Every task and opportunity can be a learning experience if you make sure to look at it that way.
Take a look at me, for example.  During my last year in college (and for a couple of years after), I worked at a restaurant.  I started out busing tables, then waiting on tables and bartending and eventually participating in buying wine for the restaurant.  This was a moderately upscale seafood restaurant.  Twenty five years later, I can tell you it was the greatest learning experience I’ve ever had, with better “real life” training for my career than any college course or seminar I took.
One day, I’ll write an article that will be called, “Everything I Know About Sales I Learned From Waiting Tables.”  Think that’s not true?  I learned about multi-tasking, and customer service, and that different people need to be treated different, with varying levels of urgency.  I learned how to upsell, and look for signs that a patron was looking for something better than the house white wine.  That meant learning about my products and understanding what they mean to people.  The restaurant offered an incentive for additional wine sales, and that was my first experience with commissions.
Working with different types of people in different positions, and treating them the way they prefer to be treated.  Not just clients, but the restaurant management and ownership; chefs and busboys and cocktail waitresses and hostesses.  One of the first great leaders I saw was the owner of the restaurant, who saw something in me and encouraged my development.
It’s only a crappy job if you view it as a crappy job.  Everything is an opportunity to learn.  And in life, learning ultimately is everything.

Forbes List Fail

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Recently, Forbes unveiled its newest list – “America’s Best Small Companies 2010”,which led me to wonder: What criteria did the magazine use to determine the “best small companies”? 
Instead of taking a thoughtful, comprehensive approach to this process, Forbes chickened out, took the lazy way out, and insulted all small business owners and those of us who work with them.  And, in the process, Forbes embarassed themselves.  Their list should have been called “America’s Best Publicly Traded Small Companies Based on the Best Earnings Growth and ROE in 2010,” because that’s what the list really is.  What it decidedly is not is a list of Americas Best Small Companies.
Someday, Forbes will realize there’s more to a successful – or “best” – company than a stock price.  But that’s probably too much to hope for.
First, Forbes excluded millions of small businesses by requiring that candidates: “…for our list had to be publicly traded for at least a year, pull in annual revenue between $5 million and $1 billion, and boast a stock price no lower than $5 a share.”  That eliminates a lot of companies – there are about 27.5 million businesses in the United States, but only about 6,500 are publicly traded.  There are also thousands of successful small businesses that earn less than $5 million in revenue, but are profitable nonetheless.  (In any event, the $5 million threshold was an illusion; the company on the list with the lowest revenue was Nevada Energy, with $29 million in sales).
But, we’ll cut Forbes a break here.  They probably didn’t want to research millions of companies, and it’s a lot easier to measure publicly traded companies, since their financial reports are naturally made available to the public.
But that’s where the breaks stop.  For Forbes imperically decided the only attributes that comprise a “Best Small Business” are:
  • earnings growth;
  • sales growth;
  • return on equity in the past 12 months and over five years; and
  • stock performance compared with that of its peers.
Say what?
Long-term, sustainable success in business – especially small business – is based not only on financial terms, but the quality of a company when it comes to such crucial areas such as:
  • employee satisfaction and productivity;
  • customer satisfaction and loyalty;
  • how well a company benefits its community and strategic partners as well as its vendors. 
Satisfied employees are always more productive; becoming an employer of choice takes a combination of corporate values, compensation, challenging work, a good environment and the opportunity for personal and professional growth.  Businesses measure this all the time through Employee Satisfaction Surveys, or 3600 Surveys.
Customer satisfaction and loyalty – also easy to measure and benchmark – were not included as criteria by Forbes.  Why?  Because this list was clearly intended not to be the “Best Small Companies in America” – but actually a tip sheet for short-term investors and traders. 
I’m not suggesting that financial measurments be eliminated when determining a best small company – it should just not be the only measurement.
Values play a significant role in successful business.  How an owner’s values permeate throughout the workforce is essential to long-term success.  Having and implementing long-term values such as quality of product and service; commitment to clients and customers; appreciation and understanding of the workforce creates a culture where the “best” truly comes out. 
It’s ironic, then, that Forbes on one hand says, “we dropped companies that are thinly traded and those with fuzzy accounting or major legal troubles,” and on the other hand names Medifast as the #1 Best Small Business in America.  Medifast, as you might know, is in the middle of a major lawsuit in which Fraud Discovery Institute accused the company of “ … pyramid-style selling – is unsustainable and will lead to a revenue trajectory similar to other multi-level marketing companies: dizzying initial expansion followed by lackluster revenue or worse…..”
Whether these accusations are true or not – they are illuminative.  If Medifast is indeed one of “America’s Best Small Companies,” won’t they still be there in 2011 when the lawsuit is behind them?  Why rush?
If you’re a day trader looking to make a quick buck – the Forbes list might be just right for you.  If you’re looking companies to emulate or model as a Best Business – Forbes is out of answers, and this list is one epic fail.
Follow Eric Swenson on Twitter: www.twitter.com/managingpeople.