Monday, 15 March 2010

What is compensation compensating for?

The financial crisis triggered an important and often impassioned debate over compensation, punctuated with even violent protest. Do we, though, clearly see what lies behind compensation and what compensation means about the relation between individuals and their company?

Drop in engagement and satisfaction at work
Surveys indicate a drop in engagement and a growing dissatisfaction at work. This trend dates back at least twenty years. According to Towers Perrin, only 11% to 23% of employees felt engaged at work in 2004 in the largest Western European countries. In 2001, an Ifop-Gallup survey had to resort to a new concept – "active disengagement" – in order to classify the 28% of the French who may go as far as to act against their company’s interests. According to the Conference Board, the percentage of Americans who declared themselves satisfied at work has gone from 61% in 1987 to under 50% in 2007. The percentage of American executives who say they are excited about their job has fallen from 65% to 55% in eight years.

Trying to compensate for the hardly compensable
What must an organization do when it can not produce the engagement it needs? It must compensate by purchasing engagement, through extra-incentives such as bonuses and perks of all sorts. The going rate then rises with the scarcity of capabilities. Is the crux of the problem in the amount thus reached, in its potentially public funding, or in the cause? The cause is the company’s inability to generate the engagement and loyalty it needs without top-up incentives. The moralizing criticism is currently fuelled by the distribution of such incentives in poorly performing companies, sometimes in the very units responsible for corporate losses. But this criticism further conceals the real issue. The incentives in question were designed not as reward for past performance, but to procure future engagement. Such incentives were not the retrospective expression of gratitude, but the price settled to secure prospective attachment.

Poor social contract
The social contract is the unwritten but compelling reciprocal commitment between the firm and the individual. Under the old social contract, individuals provided loyalty and engagement and in return the corporation protected their job. This contract disappeared with the pressure surge of hyper-competition. Yet, companies require a level of engagement that goes well beyond just fulfilling the rules. Rule fulfillment is less and less sufficient to confront the increasingly complex problems faced at all company levels. Hence the slogans on collective mobilization, identifying with the company's mission, and the importance of a shared vision. Yet, when things go wrong, one is invited to go share elsewhere.

A substitute social contract has then emerged: performance for employability. The individual commits to developing or implementing high performance strategies, and in return the corporation maintains their employability on the job market by developing their skills. This is often a poor social contract, so contributing to disengagement. Its main weakness is the inability of companies to maintain employability due to management roles that are too disconnected from people development. Extra-incentives have a twofold objective that they imperfectly fulfil: on a day-to-day basis, to buy the engagement that the organization does not intrinsically generate; over time, to make up – “compensate” – for a poor substitute social contract.

Tackling the real issue
In a nutshell, the problem is the contradiction between the organization’s growing need for the engagement of its members, and its frequent incapacity to obtain such engagement without over-promising. How can a company produce, in a sustainable way, through its very operations and organization, the engagement it needs?

Firstly, by keeping a firm hand on its growth trajectory.It is elusive to decree growth. But to be led by growth is hardly preferable. The more growth is uncontrolled, the greater the risk of ups and downs.

Secondly, by developing productivity as one of the most sustainable protections against competition. The issue is not so much individual productivity. The individual is often the bottleneck of productivity improvement, having already been put under maximum tension through the progress of flexibility and the elimination of dead times. The new front is collective productivity, i.e. cooperation. This requires going beyond all the incentive schemes based on individual performance metrics. Cooperation, one of the most valuable behaviors, cannot be measured.

Thirdly, by transforming the role of management. When managers are distanced from operations by complicated and over-stratified structures, when they spend 40% of their time writing reports, and then 30% in coordination meetings, they cannot perform their real work, notably developing people. Management has become abstract, and abstracted from its real job. Management must be provided with the means to do its concrete work: direct knowledge of operations rather than the surface of KPI-monitoring to which it is confined; real power rather than virtual or dotted-line org charts; and, instead of the sophisticated gloss over "leadership styles", a leadership rooted in incarnated values.

Copyright: Yves Morieux, 2009


Anonymous said...

I asked people around how they feel about being in the firm I am in. And it was a disaster. Towers and Perrin is probably so right about the numbers you cite in your article. Point is, people harbour such animosity towards the firm they work in. And it’s more often than not about discrimination. I read that as perceived injustice. A bunch of guys get out-of-turn raises that upset others. The aggrieved parties ask whether that 30% extra compensation going to the fortunate few has been calculated on the basis of their similarly weighted contribution to the bottomline? A team that was hired by a particular manager finds themselves reporting to another. Had the team in question known that reporting structure they wouldn’t have joined in the first place. You inspired me to look inside my own organisation closely. Thank you for that. These reactions are real. I head a large team and I try to be like a sponge absorbing the shocks and tremors from the rank and file so that the show doesn’t stop. As part of the senior management, I am mandated to safeguard the firm’s interest. But then, you could ask me in your incisive style, what is the firm’s real interest? How is it framed—long run or short run? Individual, a clique or the larger collective interest?
Thank you so much for sparking off such an intense introspection. We all have busy timesheets. It’s crucial that we pull out a bit to see the larger picture. Oftentimes, it isn’t pretty.

Sabrina Dekker said...

Regarding the paragraph on Drop in engagement and satisfaction at work:
What are the other factors? Relationships between employees, management/employees etc? How many people are working in each of these organizations where people are dissatisfied? I remember in Organizational management there is a maximum number of employees for an organization/office for employee satisfaction. Therefore I am wondering if those dissatisfied with there work feel that they are not recognized by their employers because they may feel invisible? Additionally what are those dissatisfied with their work saying would improve satisfaction? Is it recognition, opportunity, more staff cohesiveness?

Trying to compensate for the hardly compensable - These are external rewards, which may have worked in the workforce 20 or 30 years ago, I really believe that workers today are seeking that work life balance... where by work is enjoyable but still allows for one to live. I am thinking more from my perspective of job hunting at the moment and finding that organization that enables me to feel like my work, regardless of compensation is allowing me to grow as an individual and to have an impact on my community...

Tackling the real issue -
A corporation is only going to grow if the people working for it feel that they too can grow with the company and will not be stifled by it. This mean a company that listens to its staff and knows what their staff is capable of. Recognition of human capital.
I agree with incarnated values, all too often managers are thrown into these roles and they do not understand the context of the workplace and the relationships/dynamics that exist. They attempt to enforce change that may not be well received or beneficial.

Olivia Davies said...

Regarding Sabrina's comment:

The factors that are most commonly associated to engagement do include relationships between employees and their direct managers. It is rarer to see perception of senior management as a principal driver, and rarer still to see relationships with other employees. However, good or close working relationships with other employees has been shown many times to mitigate the health effects that can be associated with low engagement, i.e. absenteeism, presenteeism and stress.

Studies of engagement have mostly looked at organizations od at least 100 employees, most over 250 employees. There have been a few studies investigating firm size that have found some evidence of higher engagement in small firms (under 100 or under 50). However, this is most likely related to management techniques and "performance recognition" practices that are more common in larger firms. It is these I would say that contribute or not to a sentiment of invisibility of employees and firm size may be in practice related to the adoption of such techniques.

I also don't see how it can be proved that there is a maximum firm size for employee satisfaction. For me, only empirical after the fact testimony of employees can confirm their satisfaction or otherwise.

Also, larger firms have sub-units of similar size to small firms so it should be possible to have conditions that generate satisfaction similar to those in small firms? An individual's experience of being in a firm of 100,000 persons will still be largely determined by relations with those in proximity to them.

Employees list recognition, interest in work content, base salary (not bonuses), career opportunities, and training as factors that would improve their satisfaction. Again, staff cohesion is rarely mentioned.

Money it seems to me is like health - you only worry about it once it is gone.

For those of us who have the luxury of not needing to earn or earn more, and perhaps the misfortune to lack material ambition, then certainly the best we can do is find a job that does not bore us to tears but allows us to improve our mind, as well as leave us the time that our friends and family can enjoy what we have learnt.

I wish it were true that corporate growth relied on the growth of individuals. If this were the case, we would not even need the concept of engagement at work. In reality, a company can grow by moving its activities to cheaper countries; by standardizing and segmenting work (making it really boring), changing invoicing terms, etc. At one point however, it is true that a company will only do better if its members have an interest in contributing more than the absolute minimum. This is only true though of companies that have used all the mundane methods, and have competitors at their heels. So the best place, to go to work now might be a huge multinational which has realised this, or that is on the verge of such an epiphany, rather than a small firm where people are happy now but the next stages of growth will unfortunately be possible without any need for employee engagement (although they would be much faster and less capital intensive with employee engagement).