Compensation Doesn’t Matter


By Phil Harwood

Throughout my career in management, I’ve witnessed something about compensation and its impact on employee dissatisfaction and turnover. In fact, I’ve come to believe in this rule: compensation doesn’t matter . . . until it does. 

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I hear it all the time. And it totally makes sense. If a person is doing what they’re called to do, compensation is not at the top of the list. There are many other things that are way more important than compensation, such as: making an impact on the world, creating something that will endure because of its quality and design, providing opportunities to learn and grow, etc. These things matter more than how much money makes it into our bank accounts. 

Early in my career, I learned about Maslow’s Hierarchy of Needs. If you’re not familiar, it’s worth a quick Google search. Briefly, the idea is that people’s needs can be prioritized. Some of our most basic needs - food, clothing, shelter - are not at the top of the hierarchy. These basic needs are important for survival but once they are met, other needs become a priority. According to Maslow, the highest need is self-actualization, which equates to finding purpose in our lives. 

Compensation is related to our basic needs. We need to be able to buy food, clothes, and pay for housing and transportation. But after these basic needs are met, compensation becomes less important and other things matter more. 

Of course, all of this is generalized. There are people who only care about money. But these are the exceptions. Let’s not make management decisions to accommodate the exceptions. 

Notice that I said “compensation is not at the top of the list.” This means that it’s still on the list. And compensation can become an issue. So as a manager, our job is to make sure it doesn’t become an issue. Our goal is to make compensation a non-issue. How do we do that?

There are three things we need to have in place. The first is a wage matrix. After conducting some research, establish a wage range for each position in your organization. The range should have a minimum wage, maximum wage, midpoint, first quartile, and second quartile. Once you set the min and max, the rest is easy. This is your wage matrix. 

The second is a process for updating your wage matrix at least annually. If inflation goes crazy, you may need to update your wage matrix more than once a year. The wage matrix update is related to the cost of living increase in your part of the world. This involves some research into inflation rates for your region and competitive realities. It’s part science and part art. 

Timing is critical here. You want to get this update done before annual wage increases go into effect. Many in our industry adjust wages annually on a specific day or time of year. I’m a fan of this approach because it allows for greater control and supports the budgeting process. I would rather not deal with wage increases all year long. Get it done once a year. 

The third is to actually increase wages according to the wage matrix adjustment. This means that every person’s wage bumps up by the amount of increase to your wage matrix. If your matrix is increased by 2.4%, everyone gets a 2.4% cost of living increase in their wage. 

Keep in mind that cost-of-living wage increases have nothing to do with merit increases or promotions. Merit increases and promotions are earned and unique to each individual. Cost-of-living increases are not earned and apply across the board.

With a well-researched and fair wage matrix, process for keeping it that way, and annual cost-of-living wage increases, you will be well on your way to making compensation a non-issue. 

Going back to where we started, I’ll end with this. If your wage matrix is fair, and you’re seeing high turnover, it’s not because of your wages. Paying more may help in the short-term but it won’t help your profitability and also doesn’t solve the underlying issues causing turnover. 

Now go forth. 

Tags: Compensation , Wage , Maslow’s Hierarchy of Needs ,