A former mentor of mine used to drum it into me…to be effective, compensation should be two things: it should be fair and you should be able to explain it.
In recent years, compensation strategies have undergone a significant transformation. With the backdrop of shifting pay equity legislation and a growing emphasis on fairness and transparency, the traditional model of pay management, characterized by pay grades and salary bands, has come under scrutiny. This model, designed to allow for discretion and flexibility in determining individual compensation based on factors like experience, contribution, and qualifications, has encountered challenges when it comes to ensuring fairness and equity.
"Simplified" Pay Structures Approach
Recently there has been a shift in compensation strategy, and it centers around the idea of simplification. One company that has garnered attention for its rumored unconventional approach to compensation is OpenAI, with some headlines suggesting that OpenAI offers a more straightforward and transparent compensation model (salary plus PPU, Profit Participation Units, designed to offer employees the opportunity to share in the potential financial gains of the company), raising questions about the future of compensation practices.
OpenAI has not publicly disclosed the specifics of its compensation structures, and I will refrain from speculating on any rumored details. Instead, in this article, let's explore the broader trends and motivations that have prompted a reevaluation of compensation practices in the tech industry. We will examine the pros and cons of the new compensation models, and explore what type of companies this approach might be a fit for.
As compensation practices, both regulated and voluntary, continue to evolve, the way companies remunerate their employees may undergo a profound transformation, sparking debate about whether "simplified" pay structures are poised to become the standard in the years to come, and we are here for it!
What Exactly Are the “Simplified” Pay Structures
“Simplified” pay structures essentially mean eliminating the negotiation that often comes along with compensation for new hires and simply assigning the same pay for everybody at a particular level or job family. That reference point would increase each year in line with the budgeted increase for compensation. New hire and other equity grants plus bonus targets are fixed, typically by level, with little to no variation. Think of “simplified” structures as paying for the role, without any differentiation for the person.
Top Benefits of “Simplified” Pay Structures
This approach comes with a set of undeniable benefits:
Simplicity: straightforward compensation structures are designed to be very simple to understand. This is in contrast to the complex pay packages that are common, which can be difficult for employees to understand and appreciate.
Fairness: It’s designed to be fair and equitable for all employees. The simplified compensation structure ensures that employees are compensated based on their role and experience, and not on their negotiation skills.
Transparency: This approach is transparent by design. Employees know exactly what they will be paid and how their compensation is calculated. This transparency builds trust and confidence between employees and the company. It also helps reduce bias.
Focus on Career Growth: By removing the distractions of constantly renegotiating salaries or bonuses, employees can focus on their roles and contribute to the company’s success. Career growth and development carry a much bigger weight.
Alignment with Company Values: This approach may reflect and reinforce a company culture that values straightforwardness, fairness, and long-term commitment.
Helps offset people managers’ weaknesses. In many fast-growing companies, people managers can struggle with managing and communicating pay. Taking key decisions on compensation off the hands of inexperienced or ineffective people managers eliminates that friction.
Time savings. While difficult to estimate, I am sure all know how time-consuming setting and managing compensation can be. The potential time saved by adopting a simplified approach is likely significant.
Think of “simplified” structures as paying for the role, not the person.
Top Downsides And Risks of the Approach
This approach, however, is not without its risks:
Lack of differentiation. Not all employees or new hires are created equal. Setting one rate, even if differentiated by job and by level, runs the risk of underpaying your best employees (and vice versa).
Trading pay as the key indicator of success for career growth. This may cause problems with top performers who may feel their contribution is not valued as much as others. It also assumes that a company has a robust career development program with the opportunity to grow.
One-Size-Fits-All Approach. A uniform compensation structure might not suit all roles or levels within the company, potentially leading to dissatisfaction or misalignment with market rates for certain positions. It could also lead to significantly overpaying for roles if no differentiation is applied by role or geography.
Potential Legal and Regulatory Challenges. Navigating the regulatory environment with non-traditional compensation methods like PPUs can be complex and could pose legal challenges.
Leadership is not comfortable. It’s all well and good putting in simplified approaches but many leaders will be uncomfortable not having as much judgment and control over the compensation management process.
Is there an approach that might work for a wider range of companies?
Could this “simplified” approach be viable for a broader spectrum of businesses? For those considering the applicability of this framework to their organization, here are some thoughts on how you might apply it. The central tenets of this approach emphasize pay equity, fairness, and transparency, all while taking a long-term perspective on success at both the organizational and employee levels.
Identify jobs and job families that do not vary by expectations. Apply a simpler structure to jobs where there is less variability in both the expectations of the role and in the talent assigned to the jobs. This already happens in many instances for sales and revenue-generating roles. However, could that also be expanded to other roles such as customer services, IT, finance, etc.?
Develop more guidance for people managers. Rather than leaving people managers entirely to their own personal views and experiences, drive greater consistency by reducing the flexibility in how they administer pay. For example, allow only three data points within a salary range for incumbents who are developing, competent, and advanced.
Narrow pay for performance outcomesThe scope of pay for performance outcomes for many roles could be narrowed considerably. Similar to the salary range example above, for many roles, you may wish to offer two outcomes for bonus, target, or zero. This would greatly simplify outcomes and improve transparency.
Solving the equity distribution puzzle. Equity distribution can vary depending on the nature of the company. However, a simplified model can be implemented by establishing clear guidelines by grade, ensuring consistency in both promotional equity awards and ongoing equity refresh awards. This approach not only simplifies the compensation structure but also reinforces the overarching philosophy of pay equity, transparency, and long-term success.
Closing Thoughts
When navigating employee compensation, it's important to remember that one size does not fit all, particularly at a time of evolving pay transparency requirements. It seems inevitable that some flexibility and subjectivity in today’s models will go away, the more information is shared publicly.
Some of these changes are no doubt radical. It will be interesting to see how this space evolves over the next few years. What ideas do you see being implemented sooner?
Drop us a line at hello@nuahr.com with your thoughts on "simplified" pay structures or to discuss your company's compensation needs.