Compensation: Show Me the Money

compensationFrom: Amy Hoohoo, Director of HR
To: Jeff Parson
Subject: Job Offer

Dear Jeff,

We are pleased to present you with this formal offer for employment with the Acme Corporation as our new director of corporate communications. This is a full-time salaried position located in Atlanta, Georgia, that reports to our senior vice president of marketing, Jill Smith.

The starting salary for this position will be $120,000 per year. Please see attached for your eligibility and details of both our 401(k) program and our employee benefits.

It is a position that includes a fair amount of business travel, as we have discussed. Please review the attached travel policy and let me know if you have any questions.


Amy Hoohoo
Director of Human Resources

One year later…

Sent: September 1, 9:00 a.m.
From: Jill Smith, SVP of Marketing
To: Amy Hoohoo, Director of HR
Subject: Jeff’s Salary


In preparation for this year’s performance and salary reviews, I received the following table of salary histories for my staff. This says that Jeff’s salary is $220,000. Must be a mistake—I hired him at $120K. Can you make sure this is corrected and sent back to me?



Sent: September 1, 11:30 a.m.
From: Amy Hoohoo, Director of HR
To: Jill Smith, SVP of Marketing
Subject: RE: Jeff’s Salary


No mistake there. That’s what Jeff’s salary has been since day one. Did Curt not tell you that he had me change the offer letter before I sent it to Jeff last year? He was really worried we wouldn’t get him for $120K, so he bumped it up a little.


Sent: September 1, 11:55 a.m.
From: Curt Collins, Sales Director
To: Jill Smith, SVP of Marketing
Subject: Jeff’s Salary


I didn’t trust you to be able to hire him at that low salary. And I knew you wouldn’t listen to me, so I intercepted the offer letter, increased the amount, and had Amy send it. I figured I’d get around to telling you or that you’d see a payroll report before now, but that doesn’t seem to have happened. I can understand why you’re upset, especially given that you and Jeff aren’t getting along that well.


Sent: September 1, 11:59 a.m.
From: Jill Smith, SVP of Marketing
To: Curt Collins, Sales Director
Subject: RE: Jeff’s Salary


My direct-report employee makes $80K more than I do? Seriously? And you think he’s not performing because we’re not getting along well? How about his pay is completely out of line with his job description and he has no idea where he actually sits in the order of things around here?

Thanks a lot!



Anyone who has ever been in middle management knows what it feels like to be tasked with hiring top talent but not given enough budget to do so. But there are also scenarios where employees are paid too much or bonused too much. Either way, not having the right compensation package at the individual level and the right—and consistent!—compensation philosophy at the corporate level can wreak absolute havoc on an organization. Let’s take a look at how either of these can happen and how we can prevent it.


Jill’s story about an executive at her company literally hijacking an offer letter that was under her authority is a true but extreme anecdote about how you can start off on the wrong foot with a compensation package, but the result is not uncommon at all. Oftentimes, we convince ourselves that we’ve found a unicorn, the perfect fit for the job, the ideal candidate, and we fall head over heels.

We are so afraid we’re going to lose him or her to the competition, we front-load the compensation package with everything we’ve got. And we literally buy him or her off the market. Of course, we have to do all kinds of fancy footwork to rationalize it in our budget—but we convince ourselves it’s worth it. We make the offer, and WE WIN. We got ’em.

But here’s the rub: Does that compensation package allow you to manage your new hire for continuous growth and improvement? That’s different than just getting the hire made, and often we forget that, as hiring managers, it’s not just our job to hire top talent, it’s to manage that talent to add real growth and value to the company over time. Mark our words: you cannot do that if you overpay someone from the get-go. Not only because it doesn’t give you the room to increase the pay incrementally over time, but because it creates a scenario in which that employee compares their pay with pay outside of the company, causing them to misalign their job description with their pay.

Logic might say that if you pay someone well, they will do a great job; however, if you pay them over the pay scale of the job you’ve hired them to do, they won’t do the job at all. Make sense? Well, in Jill’s true story, Jeff was impossible to manage because he thought he was above the tasks she asked him to complete—and he was right! With a $100K differential on what the job was worth and what he was being paid to do the job, it made perfect sense that he wasn’t performing. And that wasn’t fair to anyone involved.


There is nothing to be happy about if you just landed a new hire for significantly less than you thought you were going to have to pay or less than market value. If you are getting away with paying less than market value, it’s probably because your candidate didn’t know their value or simply did a poor job of negotiating. There should be no pride in taking advantage of someone by paying them less than what they are worth for a job simply because you can get away with it.

There are going to be performance problems associated with underpaying employees. They will eventually learn that they are not being paid what they are worth, they will be resentful, they will underperform, and, ultimately, they will leave. It seems like a no-brainer when it comes to under or overpaying, but it’s probably more the norm than the exception in business today.


There are three important words to remember to get it just right: fair market value. If the most important tenet of your compensation policy is fair market value, you really can’t go wrong. What it means is that you will have to make an effort—or pay a professional to do the research for you—to always know where the fair market values in your industry stand. The goal is to know the values so well that you can build a pay scale that you can stick to and be proud of. If you commit to fair market value and never allow exceptions, you’ll land in the juuuuust riiiiight range every time.

If you want to ensure you are always in the safe zone, consider hiring an HR professional or compensation specialist to do the following:

  • Create a documented compensation philosophy and require all staff members to read
  • Create packages that are simple but flexible. Never create a package that is difficult to understand or calculate, or impossible to
  • Create compensation ranges for every role or set of roles in your company and never, ever deviate from them. If there are exceptions, they aren’t
  • Use the same structure and logic in every department. Differing structures simply invites misunderstanding about fairness
  • Prepare to pay fair market value for every role in your company
  • Assume your payroll report will accidentally be forwarded to everyone in the company someday and be ready to stand by every decision ever made related to

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