Flexible Compensation Packages

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I ran a poll recently on Linkedin and asked if people would prefer to have a flexibility in customising their compensation packages. An example would be that the company would provide a total compensation amount, e.g. $ 100,000 and let the employee choose how they would like to split it into base salary, bonus and equity.

The post received more than 2000 impressions however the voting ended with only 36 votes. 75% of participants voted for “yes” and the rest was either maybe or no.

This shouldn’t mean that I’m advocating for this type of approach. At least yet. However, it’s interesting that people would love to see that flexibility and individualisation. But…
(of course, there will be a but!)

What are the implications of such a practice?

Pay equity

The first and foremost challenge it’s going to create is the pay equity. As employees will choose different splits, this would create an unstandardised approach to base, guaranteed compensation.

Although it’s maybe less relevant internally as part of the organisation culture (of course, if communicated effectively), it would definitely impact employer/company branding when it comes to regulatory reporting.

Pay for Performance Management

That’s somehow the continuation of the above. As the individual selection of splits, it’s going to be extremely hard to implement a standardised pay for performance methodology as performance is “relative” and the benchmark is peers. Imagine the peers have no standard in their pay as the baseline: How can you effectively assess performance, and even if you do, how do you translate it to pay without disrupting that fairness?

Administrative load

Well, this is probably one of the most important reason that makes things complicated in this sense. Administrative load will be extremely high due to requests to customise employee pay data and it will definitely require quite flexible HRIS systems to accommodate that. There should be some gatekeeping to manage the customisation frequency, too.

Market volatility

Well, it’s going to be super disruptive to the market. Well, this might not be your problem in the short-term but it’s going to be hard to explain things internally down the line if there would be any competitiveness issues despite this approach.

Linkage to business strategy

Well, this is the main challenge. How is it possible to enable people to work towards the vision and mission of your organisation is through a solid total rewards strategy and its implementation.

If you allow people to customise their packages, technically you’re allowing them to play with that “linkage” as they want and this makes the organisation lose that control.

It’s extremely hard, if not impossible, to connect people with the broader strategy if their short- and/or long-term variable compensation is not or not enough linked it.

As an example, you have a bonus program which has a multiplier that’s decided based on the company’s success in terms of revenue growth and that’s a company priority. If the employee chooses to minimize the bonus portion in their package, how would it be possible to keep this person engaged and (to an extent) accountable if you don’t hit that revenue growth?

Overall, this sounds like a cutting-edge approach to rewards management. If the challenges that I mentioned above could be sorted, it might be an amazing lever to pull when it comes to talent attraction, motivation and retention. In the meantime, I do not expect the companies would disrupt the current portfolio of programs but it’s a good food for thought.

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