Musings of a CEO Headhunter

How compensation decisions make or mar hiring outcomes – Part 3

In the last two posts [post 1: https://lnkd.in/dpRb3jWG ] and [post 2: https://lnkd.in/dFJQmMj9 ], I took examples of how decisions around compensation, taken at the time of hiring, helped to make the hiring happen.

While the above highlight compensation decisions at hiring, even compensation decisions taken during the year, come back to hurt hiring. Here is an example.

The concept of Variable Pay, in a majority of corporates, is a joke – corporates routinely pay at least 80% of the target! A great performer may get 120-150% of the target, while a poor performer will still get 70-80%. Our client(s) is no exception. Until the last year.

In the last performance cycle, the client decided to make the Variable Pay, count. So, they made the variable pay, well, really variable. 😊

The consequence of the above was felt 6-8 months down the line. The market chatter had caught up by then and the new hires straight-away discounted the variable component – they were comparing their current CTC with Client’s fixed! While this is a good negotiation ploy, in our rough estimate, the client still paid 12-15% more than before. And the story will not stop there. As new entrants come in at higher compensation, it will kick start a vicious comp round for the internal talent and by the time the system settles down in some quarters, the overall compensation would have moved up significantly.

After all, wanting to pay for performance is the right thing, so should the client not have implemented it?

The client is right in tightening the variable pay model, but in our opinion, any such change should have met with the “3 proofs”:

– Proof of Success: a *good proportion* of people (10-15%?) in the system must been seen getting much higher than target, demonstrating that higher payout is really happening
– Proof of Failure: again, a good proportion of people (10-15%?) in the system must be seen getting paid much lower than the target, and thus reaffirming the change in the model
– Proof of Fairness: majority should get to know of the intent to change and the revised approach ahead of the actual change, and cede to the fairness and robustness in the performance measurement system.

We are neither C&B nor change management specialists, but the above might have set up the system for success. However, irrespective of the way the change is implemented, the fact is that ongoing decisions on C&B made routinely impact Compensation while hiring. And, I think my colleague Saroja (CFO Practice Lead) would concur, that firms do not adequately factor in the hiring impact while making routine decisions.

By Ramadhurai K

CEO Lead at Resource Bridge

Link to the previous post :