Pay Philosophy

Steven Cesare, Ph.D.

A business owner from Oregon called me the other day to talk about his company’s compensation system. The fundamentals were keenly in place: the company goals were well established, each company position had a tandem job description and performance appraisal form, the wage and salary scales were current, and the company culture manifested a results-based, team-oriented ambience. So far so good. Nice job!

Sensing increased financial pressure from the external economy, coupled with local competitor intrusion, the owner sought me out as a viable sounding board on additional elements to extend the utility of his company’s compensation system to attract, motivate, and retain highly-talented employees. Our provocative discussion touched on several noteworthy components including non-discretionary bonus plans, a performance-based career ladder, and sincere rewards and recognition events intended to commemorate productivity, while reinforcing the entrepreneurial mindset within the company culture.

With the passage of time, I paused our insightful discussion and suggested the owner decide on his company’s overall pay philosophy. Unaware of this concept, I informed the owner that a company should have an overarching theme that drives its compensation decisions relative to the local environment.

1) Match: This compensation philosophy sets pay levels that are equivalent to those of other companies in the local employment marketplace. In this case, the company targets its compensation plans at the market median (i.e., 50% of companies pay above this level, 50% of companies pay below this level). This “safe” option neither stimulates nor disenfranchises new talent from joining the team. This lack of capitalist flair, is often complemented by additional perquisites intended to attract qualified applicants (e.g., aggressive bonus potential, a well-matched 401(k) plan, and sundry paid time off options like vacation, sick leave, holidays, company closure between Christmas and New Year’s Day).

2) Lag: This compensation philosophy sets general pay levels below those commonly found in the prevailing labor market. Here, the company normally desires a pay system at approximately the 25th percentile (i.e., 75% of companies pay higher than this level). While certainly not ideal, especially in the current economic conditions defined by rapacious inflationary pressures and interest rates, this stance can work if the intangible aspects of employment with the company over-ride the penurious pay philosophy. For example, perhaps a company’s brand image is sparkling, its culture is fraternal and engaging, the training and development programs enable employees to feel fulfilled and invested, and the uniforms, trucks, equipment, yard space, and charismatic leadership incite pride, all of which may entice employees to work for this company. While seemingly a tall order to fill, this compensation philosophy can succeed if said intangibles are indeed axiomatic. Lamentably, due to inveterate focus on cost containment, many landscape companies with a lag philosophy do not adequately supplement their low wages as described above, and consequently are simply viewed as being cheap.

3) Lead: This compensation philosophy establishes a compensation structure noticeably above that found in the local community. In practice, this means taking the 75th percentile of the market value as the salary scale mid-point and building around it aggressively (i.e., +20%). Predictably, this approach should increase the supply of high-caliber candidates, improve selection rates of qualified applicants, heighten morale and productivity, decrease employee turnover, and discourage unionization efforts. Naturally, this compensation philosophy adds significantly to overall labor costs and as such, the adjoining company budget, production rates, and gross margin goals must be closely monitored. A lead strategy is often most appropriate for organizations located in highly-competitive labor markets.

As a capitalist, I firmly agree with the timeless adage that “you get what you pay for,” whether it is for goods, services, or labor. For the lead pay philosophy to be successful, all requisite drivers must be optimally aligned: ambitious revenue goals, aggressive hourly billable rates, challenging production standards, unquestioned job quality, and a performance management system fixated on employee accountability.

Do you know why? Because your customers expect to get what they pay for!

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