The New Pay:
Linking Employee and Organizational Performance
Organizational changes in customer relationships, leadership style and structural design demonstrate that it is possible traditional pay programs cannot support these new thrusts and may have outlived their usefulness.
Jay R. Schuster, Ph.D., and Patricia Zingheim, Ph.D., have written a compelling story for any employer struggling with the economic and competitive challenges of the 1990s. The New Pay: Linking Employee and Organizational Performance presents an insightful review of the socioeconomic conditions that have created the productivity and skill-gap crisis faced by many U.S. organizations.
The authors demonstrate the ineffectiveness of traditional pay programs in addressing the changes businesses are making. Organizational changes in customer relationships, leadership style and structural design demonstrate that it is possible traditional pay programs cannot support these new thrusts and may have outlived their usefulness.
The greatest value of this new work is its comprehensive look at "total compensation strategy." This strategy, the authors contend, must be a direct extension of the business, financial and cultural aspects of an organization, and it is most effective when placed in an environment of high employee involvement. The authors start with a review of five key steps that are essential for employee involvement and develop a framework that permits organizations, by their readiness and/or willingness to increase employee involvement, to begin the process of developing a total compensation strategy.
In several excellent chapters, Schuster and Zingheim take most of the conventional wisdom of traditional pay programs and challenge it. Base pay traditionally has had many, if not all, of the strategies of the pay program built into it. But there is good research that demonstrates those things that base pay does well and those objectives that are better accomplished through variable or indirect pay. The purpose of traditional job evaluation and pay structures are analyzed in terms of "New Pay"" objectives. They, like traditional base pay, are found wanting, especially in creating an atmosphere for higher employee performance.
This reviewer fully appreciates Schuster and Zingheim's choice of The New Pay as a title. This phrase was coined earlier by Edward E. Lawler III, Ph.D., director of the University of Southern California Graduate School of Business Administration's Center for Effective Organizations. Lawler used the phrase to categorize these types of programs. Other classifications, such as "alternative rewards" or "contemporary pay," seem to suggest that the traditional practices will stay with us and imply a "fad" view of these programs. The New Pay implies that businesses will adopt these practices as a general rule.
The New Pay develops the principles of variable pay, stating that three elements are needed to make a distinct break with traditional compensation. A portion of total compensation must not be added to base pay, performance should be measured in groups rather than individually, and a partnership must be established that enables employees to share in the financial ups and downs of their company. The New Pay impressively develops the argument that variable pay is a powerful communication tool that can either lead or support major organization change efforts. The authors point out that variable pay will be the primary future link between employees and their organizations.
The careful definition and explanation of the variety of new variable pay tools support the argument for changing the "one size fits all" approach to compensation. The authors delve into a variety of delivery, design, measurement, funding and participation issues for the broad mix of plan options, and they provide a well-thought-out road map for companies interested in implementing new rewards practices. Variable pay is shown to be a flexible and adaptable tool for organizations seeking competitive advantage through improved employee performance.
As part of total compensation strategy, The New Pay includes an excellent treatment of indirect pay programs that is often missing in other discussions of so-called alternative rewards strategies. Many indirect pay programs are too inflexible to adapt to the rapidly and constantly changing business environment. A discussion of the role of indirect pay plans that are expensive and based on entitlement recognizes major conflicts between organizational practices and needs. As the evolution of indirect pay continues, it is likely that the desired condition of protecting employees from certain unexpected expenses may become more closely tied to performance and contribution instead of merely tenure.
Flexible benefit programs have been around for many years in several organizations, but the time to review them in light of New Pay objectives is clearly here. Organizations considering New Pay programs can find that carefully designed indirect pay programs can strengthen an employee-organization partnership. Strong communications programs are critical to linking indirect pay to the total compensation strategy of the enterprise.
The New Pay concludes with a survey of practices and predictions for the future. The authors support their experienced-based discussions of base, indirect and variable pay in earlier chapters with studies done in both capital and labor-intensive organizations.
The authors tell us that companies will continue aggressive pursuit of improved employee performance because of many factors, including continuing pressure for superior financial performance, global competition in most markets, oversupply of unskilled labor, shortage of skilled workers and so on. They predict increased recognition on the part of employers that traditional pay programs cannot assist adequately in these areas and that the growth and success of New Pay principles will be a hallmark of the next generation of reward methodologies. The authors are careful to point out that New Pay will not be the only factor for achieving competitive advantage through improved employee performance, but it clearly will be "the only way to make employee pay a constructive catalyst for this change."
Well-researched, innovative and systematic in its approach to issues concerning pay systems in organizations, The New Pay is must reading for human resources professionals and business leaders.
Copyright 2012 Schuster-Zingheim and Associates, Inc.