Leadership Tip 17: Consciously Choose How You Optimize the Salary Money

Tim, the Engineering VP, was worried he would lose people after their reviews and salary changes. He didn't have enough money to pay the salaries he thought everyone deserved. He'd fought with his fellow VPs for more money, but that didn't work. He had a too-small pot of money to distribute. He had these problems:

• The company did salary planning once a year, and January was it.
• Tim's predecessor, Bob, had not done any succession planning. Instead, Bob hired very senior people with salaries to match. If Tim wanted to keep them, he had to pay them what the market thought they were worth.
• Tim had hired more junior people this year and started new ways to bring people up to speed. Those junior people brought out the best in everyone. But Tim didn't have a large-enough pot of money to give them the raises Tim thought they deserved.

Tim didn't have much time to manage paying people by value at their various levels.

Engineering management, including the directors and first-level managers, knew about the salary problem. They'd done some brainstorming with Tim, but they had no ideas. All of the engineering managers were concerned that several senior people would leave because the salary changes did not reflect the value each of the engineers offered.

Tim's management used power-over, not power-with to decide. What options did Tim have?

New Information

Beth, a director who reported to Tim, had a one-on-one with Adam, the most senior, eldest, and highest-paid engineer.

Adam told Beth, “I plan to retire two months after I receive my raise. I'll even give you 6 weeks notice so the team has a chance for an orderly transition. I don't want anyone to suffer—not the team and not the customers.”

Beth had new information that would affect Tim's decisions. What should she do?

1. If she told Tim, they could lay Adam off now. That would allow Tim to redistribute Adam's salary now for everyone else. However, the layoff would change Adam's retirement calculations because the company had grandfathered him into a pension. In addition, the company matched Adam's retirement contributions. A salary increase increased the pension payout. Because the company used the ending salary for his pension, even a few thousand in yearly salary made a huge difference over the duration of Adam's retirement. Add in an extra month or two of work with matching retirement contributions, and Adam's retirement picture changed. Does Tim choose Adam's retirement or the rest of the team?
2. Tim had another option: they could keep Adam on the payroll, but not give him a raise since he was ready to retire. That would allow Tim to reallocate Adam's raise to the rest of the team. Adam could retire whenever he wants. Sure, he won't get the boost of the extra money, but it would help the team.
3. Beth could keep her mouth shut. What if Adam changed his mind? Would Adam's salary or raise really make that much of a change? If he did retire, she could insist on just two weeks notice, and then use his salary or raise to augment the current raises. Could they even change someone's salary three months after a normal salary change?

Managers face these choices all the time, because of the very tight box they use for salary-based decisions (one time per year, when, and amount).

You see the problem. Scarcity—especially of money—often creates management incongruence. It's time to decide whose interests you optimize for, and when.

View This Situation Through a Lens of Congruence

(If you don't know about congruence, how we balance the self, other, and context, please read Practice Congruence to Create an Effective Culture.)

Let me go a little meta and ask who or what we might optimize for:

1. The company, because we might be able to generate the most “fair” decisions about the money.
2. The managers, because they are in a terrible position.
3. The retiring/leaving employees because they already did the work for these rewards.
4. The people who remain because they need pay parity.

There might be more possibilities.

Notice that all these options take just one person's perspective. That's because we focus on the individual for rewards. (See the Flow Efficiency series to see why that's nuts for collaborative teams.) In collaborative teams, we cannot compare anyone's contributions with another person's because we can't separate the work. However, our systems of paying for “individual” performance demand that we try.

Individual performance rewards the company first, and the people second. That's incongruent.

In addition, individual performance blames the people with less-obvious contributions and placates/elevates the people with more obvious contributions.

And when management decides on a too-small pot for raises, everyone loses. Management only considers the context, not the people.

Decisions Through a Congruence Lens

Here's how I see these possible decisions through congruence:

1. When senior management allocates insufficient money for raises, they blame everyone else for their (management's) decisions. These decisions include management pay, not only decisions about how to manage expenses and capitalization.
2. Lay Adam off now: Tim placates senior management and blames Adam.
3. Don't offer Adam a raise and use that money to create better parity: Tim placates senior management and placates Adam (although Adam might not know).
4. If Tim/Beth change anyone's 6 weeks notice to 2 weeks notice: congruent, balancing self, other, context. When Adam (or anyone else) offers 6 weeks notice, he says to the team (in a blaming stance): “You're not capable of learning everything I know in 2 weeks. I'm going to make sure you learn it all.”
5. If Beth doesn't say anything, she placates Adam. She might be super reasonable, too, forgetting everyone has a stake in this money decision.

I'm sure there are more incongruent stances.

Let's talk about how you might make these money decisions, not by default, but by consciously deciding.

Conscious Money Decisions

Money decisions reflect your culture. And most of the managers I know value “fairness” in how they deal with people. They think that fairness is part of their culture. (It's not, but that's a different leadership tip.) Tim and his managers want to be fair. How can you be fair when the entire situation is incongruent?

You can't be.

Instead, choose who you want to damage the least.

Here are my guidelines for these decisions:

1. Insist on only two weeks of notice for anyone, any time. It doesn't matter if someone is retiring or taking a new role or what. Not more than two weeks notice. I see several reasons for this:
   1. The team (and the managers) have the most urgency to make sure the person leaving hands off their knowledge and work. With more than two weeks, people use Student Syndrome. (And I bet you've seen people fired one day. You all figured out what to do and what to say no to.)
   2. The managers have the most flexibility on which payroll money becomes available and how to use it.
2. Consider alternatives to compensation other than cash. For example, what about more vacation time? (Let me just say US vacation time differs from everyone else's. Too many people never get more than 3 weeks of vacation.) Depending on your company's accounting system, the company might manage salary and vacation time differently. That might allow managers to offer more paid vacation if they don't or can't offer raises.
3. Start the conversation now for next year. In Tim's case, consider how to change the job descriptions to encourage more collaboration. Work with HR about how to compensate individuals and teams, and what “fair” looks like.
4. In addition, I would challenge senior management over their compensation and how to free up some of their salary for the people doing the technical work. (That's not Insubordination, although you might think of it that way. Find a common goal with management. )

Whatever you do, don't fool yourself. No money decision is fair. And when you pit people against each other, it's nowhere near fair.

Make conscious—not default—decisions about how you decide about money. And if you can't change anything this year, start planning for next year.

This tip is mostly from Practical Ways to Lead an Innovative Organization.

This is a part of the series of leadership tips.