The corridors of organisations are full of CEOs who talk about the importance of developing human capital. They declare unequivocally that 'employees are the most important asset' and that quality workers meet goals and improve performance.
However, slogans and actions are not the same. In practice many managers still do not relate to the preservation and development of human capital at the strategic level. Instead of investing resources to obtain measurable answers regarding the real worth of their workers, they settle for their own hunches.
The gap between statements and actions is also evident in workers’ compensation, when managers consider the appropriate compensation model. Most of them still believe that it’s preferable to reward in equivalent to the national average and according to the professional level, out of a desire to be perceived as a 'fair' company. However, this approach prevents the organisation from estimating the true value of each worker in comparison with the organisational profit.
How does one correctly measure a worker’s value?
First of all, ask yourself how many people you will have to recruit to reach the level of performance of your best worker.
Google's former senior vice president of people operations, Laszlo Bock claims in his book Work Rules! that: 'If the number is more than five you probably pay your best worker too little.' Bock is right: consider the costs of locating, recruiting, training and replacing that outstanding worker, all of which could have been spared if the organisation had been educated in the first place to reward talent according to their value.
Therefore, it’s precisely the company that espouses a policy of equal rewards in the name of 'fairness' that produces a great deal of unfairness. It sends a message to its most outstanding worker that the organisation is blind to their true value, and that encourages resignation.
Changing the paradigm
Fairness in pay does not mean that all workers at the same job level earn the same salary. True fairness is made possible when pay matches the contribution of the worker. Bill Gates said that "an excellent engraver deserves a salary much higher than an average engraver". Therefore the first step is to change the paradigm and understand that in the 21st century fairness is not synonymous with equality, but rather a relative concept that is supported by a quantitative calculation of the worker's value to the organisation, detached from their managerial level and position.
To create a reward system that meets this new perception of fairness two capabilities are required. One is a clear understanding of the worker's influence in the organisation. This understanding makes it possible to examine the available budget and decide on the form of the reward. To remain within budget in this reward system the budget must be divided according to performance. Understanding that low performers may be likely to earn less may leave you with an uncomfortable feeling. Nevertheless take comfort knowing that you have now given your best workers a reason to stay and the rest of the workers have a good reason to try harder.
I am often asked whether such a reward system is not a sure-fire recipe for resentment and jealousy. This is where the second capability required of managers comes in: a deep understanding of the reward system so that they can explain it to workers. This capability, that deals with the basic culture of communication in the organisation, meets three main needs: it creates justification for the method, clarifies how the workers can improve performance, and motivates them to act in order to enjoy greater rewards.
Fairness is contagious
When these two conditions are met an organisation is perceived as twice as fair: firstly within the organisation and secondly in its position compared to other organisations in the labour market.
An organisation that is perceived as fair attracts the best workers. An excellent example of this is Google. Its perception of fairness allows one worker to receive stocks worth $10,000 while another in an equivalent position with a decisive organisational impact will receive stocks worth $1,000,000. Or a situation where junior-level workers with great organisational impact earn more than those with average performance and higher positions. This perception attracts the brightest professionals who remain in the organisation over time.
Fairness to all
This method is suitable not only for the tech sector. With adjustments industrial environments can also successfully adopt it. “When the system works people know where they stand,” said Jack Welch, the legendary CEO of General Electric. They know how to evaluate the chances of moving ahead in terms of wages and what they need to do to get the ball rolling. This understanding, which is based on measurable facts, enables the worker to control and improve their fate. It doesn’t get fairer than that.
Ravit Oren is an organisational leadership expert, an academic lecturer and researcher, a corporate HR executive, a public representative of the Israeli Labor Court and a board member in public and governmental companies