Principle Based Management™ (PBM), formerly known as Market-Based Management®, provides a holistic approach to making decisions, solving problems, and creating value for individuals in your community, team members in your organization, and society at large. In this PBM 101 series, we’re unpacking mental models, ideas, and tools that can help you reach the next level in your work.
As organizations struggle with a tight labor market and the shifting norms of workplaces during a pandemic, compensation packages are top of mind for many nonprofit leaders. Are you keeping pace with similar organizations? Are you still offering the right benefits? Are you still creating mutually beneficial employer-employee relationships?
We think that the Principle Based Management (PBM) framework provides a lot of helpful guidance to answer these questions. (Click here to read recent articles on the topic.) However, we also understand that crafting compensation packages is a very complex process. That’s why we want to explore five common misconceptions about compensation, helping you avoid missteps in your own organization.
Misconception #1: Variable pay is the best way to incentivize performance.
Many employers assume that variable pay is the only part of a compensation package that addresses employee performance. However, this perspective wrongly diminishes the value of other compensation strategies. All compensation—including base pay, spot bonuses, and variable pay—should be designed as a reward for performance. That means that it’s not about any one tool, but about the total package: total compensation for total contribution.
Misconception #2: Market survey data is the best tool to benchmark compensation levels.
Although market data is a useful input when designing compensation, but it has its limitations. The data released in compensation studies is typically about two years old, and employment markets can change fast. Think about it, is the market you’re hiring from the same as it was two years ago? The most effective compensation packages are designed to reward real contribution to your organization’s success. It’s up to you to measure the value of each team member’s total contribution, rather than relying on an abstract industry standard.
Misconception #3: A team member’s total contribution is limited by their authority to make decisions.
A person’s individual authority to make decisions for an organization is an important element of effective management, but should not be a limiting factor for reward—their contribution should be. Your team members should feel equipped to explore ideas and offer feedback on any activity in the organization. They might require additional approval from a team leader to take action, but they should not be prevented from making recommendations, and recommendations that lead to good outcomes should be rewarded.
Misconception #4: Compensation should be designed around results, not effort.
Although compensation should absolutely reward positive results, it’s also important to incentivize good behaviors that, if repeated, will lead to results in the future. If your employees are demonstrating alignment with your mission and values, you may want to recognize and reward that, even if they didn’t hit every performance goal.
Misconception #5: A new role or responsibility should always result in a change in compensation.
Compensation should be tied to employee contributions: their impact on your organization’s success. Although a change in title or responsibility often leads to greater contribution, it is not always the case. If you want to incentivize top performance, be careful to ensure that new compensation is offered as a result of long-term value creation.