Compensation Dentistry – The Wisdom Teeth (part 4)

Once again, I am finding ways to make compensation as fun as going to the dentist!

Most people cringe when they hear the words “wisdom teeth.” Between 25% and 70% of all adults have had their wisdom teeth extracted. (I know, just the thought makes my jaw hurt.) The process is usually not fun. In the best of times, it requires it requires discomfort. In the worst, it requires surgery and real recovery time. To make things worse, the longer you wait, the harder the process is sure to be.

It’s often the people who have worked the hardest to take care of their teeth who procrastinate the longest. These are the people who have healthy gums and perhaps no cavities. They have worked successfully for decades to avoid negative dental experiences. Unfortunately, even the best of us may learn that we need to have our wisdom teeth pulled or risk crowding out our other healthy teeth.

Welcome to the world of pay compression! Pay compression is the definition of the circumstance where the people at the top of a company are paid so low that they leave so room for growth beneath them. Often these are well-meaning long-term executives who are working hard to preserve budget to pay others, or fund company initiatives. What they may not immediately realize is that they are implicitly, and sometimes explicitly, making it hard to pay others what they are truly worth.

The most typical situation is the founder of a privately-held company that is “making enough.” This seems like a magnanimous gesture, but much like going to Thanksgiving dinner at your father-in-law’s house and carving the turkey or sitting at the head of the table, it can be truly uncomfortable when you are NOT the father-in-law. Staff may appreciate the fact that the top person is keeping their pay low, but like a crowded tooth, they will become difficult to keep in the long-run.

The problem is difficult to correct when it has become systemic. Board members may find it hard to accept the types of pay increases required to hire people below the top executive. Recruiters will find it hard to negotiate pay for anyone who truly deserves more than an underpaid CEO. Some of this can be avoided with very clear early communications. Some of it can be corrected by removing the CEO's pay from any type of internal structure and paying everyone else what the market and your compensation philosophy require. If left untended the results can be like the surgery to remove impacted wisdom teeth.

Pay compression is something that creeps up on you… like wisdom teeth. It is easy to avoid with regular analysis and communication. But without this, it can be a sneaky problem. It’s not an issue for years, then all of a sudden it becomes the only thing you can think about. Having gone through the process of having impacted wisdom teeth removed, and that of helping companies correct pay compression issues, I am not sure which is a more painful process for the people involved. If you know you are (or will be) facing this in the next year, the time to find a solution is now.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.