Before the pandemic, Jenny, the VP of Engineering, insisted that the engineering staff needed to work in the Boston area. She expected that people would mostly work in the office, and they did.
However, during the pandemic, Jenny changed her mind. She said that as long as teams had sufficient hours of overlap, she didn't care where the managers hired people. (For a discussion of hours of overlap, see Hours of Overlap, the First Principle of Successful Distributed Teams.)
Now, the organization employs people all over the United States. The teams negotiated working agreements to maximize their hours of overlap and collaboration. However, now the managers have trouble reconciling how to offer fair compensation and benefits to all employees.
Here are the questions they're struggling with:
- Do they pay people based on their location, which has its own cost of living? Or do they create salary bands that pay everyone close to the same wages for a given level?
- What about when people want to work? Does each team negotiate its own working agreements, or do the managers decide, so the entire organization has some relative core hours? (See last month's issue, Three Possibilities to Move from Power Over to Power With.)
- Because most (US) health insurance is location-based, how does the organization decide on which health insurance to buy and how much does the company contribute?
You might have other benefits you're trying to manage across many locations.
Each benefit adds to the loaded labor cost, the company's actual cost for an employee, over and above each person's salary.
Jenny needs to manage her department's costs. And she wants the teams to create products the customers want to buy. Jenny has experienced what many of you have, too: Collaborative teams with diverse experiences can develop products customers want to buy.
Over her career, Jenny has learned that it's easier to sell more product than to manage costs. (Raise the top line, revenue, not the decrease the bottom line, costs.) That means she needs to encourage more incremental development—and that the product teams feel as if the benefits and compensation are fair for everyone.
Jenny focused first on more frequent releases to raise revenue.
Focus On Releasing Products Customers Want to Buy
Since Jenny wants her department to focus on creating and releasing useful products, she decided she wanted everyone to focus on:
- Collaboration within and between teams
- Reduced cycle time
- And a good customer experience.
Why? Because internal and intra-team collaboration can reduce the cycle time and release faster. With that shorter cycle time, the team(s) can reduce the time to release an increment of value. The longer it takes to release, the less anyone's actual salary matters because the wait time dwarfs the value of the work. (See Throughput: Why Salary Costs Matter Less Than You Think They Do.) It's entirely possible to waste so much time that the Costs of Delay overwhelm the salary costs.
The more often a team releases a feature, the less that feature costs—and the less the actual salaries matter. Instead, the company can benefit from a faster release of incremental value that makes the product more enticing to buy.
All three of these points help increase revenue.
While that works for how the teams and the managers work, Jenny still needs to address the relative fairness of the benefits.
How Does the Way We Work Affect Benefits & Compensation?
Jenny does need to manage salaries. The Engineering department uses six salary bands that reflect the person's level of influence, collaboration, and expertise.
Before the pandemic, no one even considered changing compensation or benefits based on a person's location. However, now that people work all over the US, HR worried that the company would “overpay” or “underpay” some people. And the costs of health care were not the same across those various locations.
Jenny worried that changing salaries by location would affect a team's collaboration and, by extension, its cycle time. She realized long ago that the more the team focuses on bettering its teamwork, the higher a given team's throughput is. That works for when teams work together, too.
If you offer “equal” benefits, will you get more collaboration, a decrease in cycle time, and an enhanced customer experience? It depends on what the managers reward.
Identify What Your Organization Rewards
Up until now, HR wanted to reward an individual's contribution, thinking in terms of resource efficiency. However, the more teams collaborate, the less anyone can tell who made which contribution. How can anyone know the value of that contribution to the entire product? I suspect you've seen this conversation:
Person 1 says, “I have a stupid question,” Then, Person 1 asks the question.
Person 2 responds, “Thank you! I didn't even realize I was stuck on that!”
With any luck, Persons 1 and 2 discuss all their confusion.
Even if you're not part of an agile team, highly collaborative teams have trouble identifying who contributed what.
Jenny and her colleagues are working with HR to address how to create a combination of team-based and individual-based compensation. For now, Jenny asked all the Engineering teams to ensure they have sufficient overlap with anyone else with whom they work. Also, she's directed the HR team to create “equivalent” health care options wherever people live.
Jenny can do this because the teams focus on creating great products their customers want to buy.
When people think you're treating them fairly, they will collaborate to create a great product even if the treatment isn't equivalent. And the more they can decrease cycle time, the more flexibility you have as a manager because you will sell more—or learn earlier that you need to change the product.
(This newsletter touches on topics in From Chaos to Successful Distributed Agile Teams: Collaborate to Deliver and Practical Ways to Lead an Innovative Organization.)
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Pragmatic Manager: Vol 19, #5, ISSN: 2164-1196
This comes down to two philosophies: You pay people based on their value; or you pay what the market demands. I get it that we all want to pay based on value. That seems fair, but that would have us paying our janitors more than our engineers, I imagine. On the other hand, paying market rates used to mean you paid based on local market rates. That is, you paid more for someone in the tighter Silicon Valley market than for the same skills in Peoria.
I wonder if it will work out well for people living in higher paying areas when companies pay what the market demands. Businesses will likely hire the lowest cost/value employee, favoring people willing to live in lower cost areas, not cities. We saw hints of that effect with offshoring, not always to the best results.
Thanks, Ken. When I work with managers and show them the delays and how much the delays cost, they realize straight salary isn’t the barrier they thought it was. In addition, right now, this is a candidate market. (When it’s not, I’m sure things will change.)
You saw the effects of far-away outsourcing (as I did), when managers did not pay attention to delays. I tried to discuss that in Throughput: Why Salary Costs Matter Less Than You Think They Do. If we want both fast and as inexpensive as possible product development, we need collaborative teams to work together so they reduce delays. That’s how we get both the least expensive and fastest product development. Do that often enough, and the revenue numbers go up.
I have yet to see janitors worth more than engineers, but maybe you meant something different than what I read?
Let’s say you have a company with 100 engineers and 2 janitors and you lose one of each. Which will you notice more? I’d call that value. Of course, I can easily get a replacement janitor, and for way less money than the engineer, but that doesn’t really seem fair given how much I noticed the missing janitor.
If we want faster and more useful product development, then we need to create an environment in which everyone can do their best work. That includes a clean workplace.
Janitorial services are a commodity. (Yes, some are better than others, but they are a commodity.) If you lose a janitor, a small application of money solves that problem within hours. If you lose an engineer, even if you take my hiring advice, it takes a minimum of a week to hire a new engineer. Most places take months, which is nuts.
IME, the lack of a janitor is a small problem we can solve fast. The lack of an engineer is a much larger problem that takes much more time. That’s why engineers make more money. That’s the value.
I’m completely cool with that reasoning. And, I think it’s the same reasoning that leads us to pay differently based on locale. I’ll be interested to see how all this plays out.