Wednesday, October 24, 2012

Should compensation be based on performance or experience?

I often see the following situation: two employees, one fresh out of college and one who has been in the industry for 15+ years.  The younger one does a great job... producing 2 to 3 times more than the older one.  Yet their salary is 2 to 3 times LESS than the experienced employee.  Why?  Because often our salaries are determined by where we've worked and how long we've been in the industry.  This performance/salary mismatch has been bothering me so I've been trying to think of alternative systems...

What if everyone receives a base salary which is equivalent to what an entry level employee would make.  That amount would be guaranteed as long as you are employed.  In addition to that amount, you would be bumped to higher levels based on your performance.  The levels might look something like this (arbitrary amounts):

(Base) Level 1: $40,000 / year
Level 2: $65,000 / year
Level 3: $90,000 / year
Level 4: $125,000 / year
(Rock Star) Level 5: $150,000 / year

Each review period your performance would be evaluated and your salary adjusted up or down accordingly.
So if the brand new college kid wants to go crazy (and has the skills), he can make "rock star" level immediately.  If someone else is coasting... their salary will reflect it.

I imagine this system being harder to budget for.  Potentially... every employee could make "rock star" and you would be paying out a lot.  However, it would also mean that your organization should be doing AWESOME!
Also, should this apply to all positions within an organization or should each role be given its own set of "levels" that are appropriate?
The performance based model also has the drawback of less compassion for employees who have a personal crisis that impacts their performance.

Any experiences with this kind of a model?  Potential drawbacks?

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