The Future of Pay and the Future of Work: What Got Us Here Won't Get Us There

After our discussions at the recent @TR2050 meeting in New York, about how we approach compensation and rewards in our organizations, I came away with the conclusion that as we continue to evolve into the future of work, our strategies for pay and benefits must also evolve.

Rethinking Our Workforce

Why do we hire and set initial pay employees for their skills and competencies, and yet, as soon as they become full-time staff, we place them in a “job”, and their skills/competencies no longer play a role in their pay? This is especially perplexing as the likelihood is that they will leave for another offer which is also based on their skills.

The idea that a one-size-fits-all approach to compensation is effective is outdated. The current workforce is diverse, and our pay strategies need to reflect this diversity. Our focus has traditionally been on full-time employees, but the reality is that the workforce is changing. With the rise of the gig economy and flexible work arrangements, we need to broaden our perspective to include all types of work models: gig, part-timers, contractors... everyone. Currently, rewards professionals don’t have a say on pay equity across all types of workers, or even the data to determine if such equity exists. This is a first step in moving towards a future of pay model.

Moving Beyond the Standard Approach

We often assume that employees are generally dissatisfied with their pay or that younger workers don't value long-term incentives. These assumptions deserve a second look. It is too common that companies ignore the feedback from employees. If customers say they want a better product for a lower price, the company doesn’t dismiss this feedback out of hand by saying “the customers always say that”. Yet, we do this with employee feedback quite often.

Do your employees fully understand their compensation packages? We need to be sharper in listening to employees, clearer in our communication and more agile in implementing changes. Companies that have done so, like Alibaba, Shopify and Unilever, have found that employees want personalized pay packages, the same way they want personalized experiences from their service providers and retail outlets.

Pay, Wages, and Performance

Traditional pay models that link high pay with better performance and lower turnover are too simplistic. Pay is not just as an expense but as an investment in our workforce. Paying our front-line workers well, for instance, isn't just about costs; it's about driving the success of our business. A common assumption, almost a dogma, is that people work for money, and that the promise of more money motivates people to work harder. Reality on the ground does not bear this out. Ask your employees how much harder they are willing to work to earn the extra 2% in merit pay that getting to the next echelon in performance rating would grant them. I reckon not much more. While you are at it, also ask your employees (not in sales and not top executives) if every day, when they wake up, they think about how they will maximize their annual bonus that day. Maybe 20-25% of them do, but the rest do not. If they are not thinking about the bonus when they make decisions, is the incentive really motivational?

Think about it this way: How many “happy” employees do we have every year when they receive their merit increase/bonus payout? How many upset ones? Do the latter outnumber the former? Why do we keep in place policies that make our employees upset?

Don’t take my word for it, ask them! And listen carefully. To many, higher base and lower variable pay is a better way to pay, meaning we can attract and retain talent better, without a loss in performance.

The Role of Incentives

Incentives are often viewed narrowly as tools for behavior change. However, as we discussed earlier, most people don’t think about it when they go to work. However, incentives do play a crucial role in communicating to staff what really matters. Research, however, has shown that the amount of incentive is less relevant for this group, and that team incentives work better than any form of individual incentives. Are we too wedded to “market practice”? If so, the solution is to run some pilot programs in some part of your organization. Better yet, design a flexible pay system where employees can choose whether to receive more base, more bonus and in what pay mix proportion. We could also include long-term incentives in this model. Is there room for more flexibility? Again, don’t take my word for it, try it!

Understanding Performance

We need to acknowledge that our rating of employee performance is not always as objective as we would like. Even as some companies try to move to rating-less performance appraisals, we are still mostly relying in forced ranking approaches to “fit the curve”. A quick cure to this is to move to team-based incentives. “But what about freeloaders?”, many will say. Supervisors should be able to spot the laggards, as well as the superstars. Competency/skill rankings are also useful in this regard. Even having the team do an internal assessment of all team members. We must look at a broader range of factors that drive performance and not stay stuck in the past. Consider that, even as we pay incentives to full-time staff as a way to “motivate” them, we have no problem paying for skills if the employee is a gig, part-time or project worker.

Benefits: More Than Just Basics

With the new work models, benefits can play a very different role than has to date been the case. Have you, for instance, thought of benefits for performance for your gig workers? Or benefits for retention? Benefits can be more than just standard offerings; they can become a strategic part of employee satisfaction and performance. We need to view them as integral components of our compensation strategy, not just add-ons.

Evolving Culture and Embracing Transparency

Our perception of company culture as static needs to change. Culture is dynamic and shaped by all members of the organization. Transparency in how we operate isn't just a risk; it's a necessity for fostering engagement and trust. And transparency in pay is an important part of that. Nobody really believes that pay is confidential, and nowadays any employee or candidate can search the net to know how well your company pays and how specific jobs are priced by the market. Keeping pay opaque only hurts the trust we are trying to build. Many will worry that, if we make pay transparent, it may show problems with how we are paying. “Let’s clean up house first, then we can communicate”, but then the house never gets cleaned. An alternative approach is to open this information, warts and all. Sure, at first it will create some havoc, but within a couple of years you should be able to bring it all within control. And it will likely be less time than the “cleaning house” plan that you had imagined in the first place.

Looking Ahead

Can you think of the last big change we had in the rewards space? Flex benefits, which were introduced in the 1990s. In fact, our job-based compensation system dates from the 1940s.

As we move forward, it's crucial to test these assumptions. Some will be more challenging, like transforming our overall pay strategy and increasing transparency. Others, like reexamining the role of benefits and analyzing pay equity among all groups of employees, might be more straightforward starting points.

In a world where personalized services are the norm, especially for millennials, it's reasonable to expect the same level of customization in our workplaces. As we prepare for the future of work, with its varied employment models, our compensation strategies must be flexible and adapt to these diverse needs.

In future editions of this blog, I will continue to explore about innovative ways to compensate our employees. Even as I write this, I know it is a monumental task to change decades of thinking about pay in only one way. Our colleagues in recruitment and in L&D have already changed, so has the way we understand our customers. Isn’t time that we in Rewards follow their example?

I encourage you to share your thoughts, experiences, or questions on these topics. Your insights are valuable as we navigate together towards a future of pay. Join the discussion in the comments below or directly through tr2050.com.

Let's collaboratively build a new compensation model to suit the future of the workplace.