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Why it’s time that organisations discussed demotion

16th May 2014
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Within this blog I want to discuss how the current work system of coupling compensation with years of experience is harming both employees and organisations, and how demotion can play a role in re-thinking compensation for employees. I truly believe that it’s important to address the topic as it’s not in anyone’s long term interest for employees to earn more than the value that he or she brings to an organisation and it’s important to maintain a balance.

Additionally, it’s time we began thinking about moving towards a more modern approach and it’s time for organisations to start being honest about the added value of their employees.

The vast majority of organisations presently adopt the mindset of coupling compensation with years of service, and of separating added value and reward. What this transpires into in reality is that whoever has the most years of service is seen to be the most valuable; and is compensated accordingly. Many organisations are currently stuck in a trend where employees can only ever earn more and never less, and such a work system where there is a mismatch is harming employees and organisations.

GILDED CAGES

Firstly, it traps large numbers of employees in gilded cages. When organisations put employees in positions where they make more money than their value (in gilded cages), it makes it extremely hard for them to leave without suffering financially. Once an overpaid employee decides to leave the organisation and looks elsewhere, they quickly discover that the remuneration they will receive elsewhere is well below what they receive now. This in turn makes it all the harder to leave the organisation, and when employees want to leave the organisation but can’t, their engagement and motivation suffers.

STIFLING TALENT

Secondly, scores of talented employees are also feeling stifled. As organisations are afraid of rewarding their talented employees too quickly (as it can never be undone), there is a risk that large numbers of talent are on the wrong side of wage remuneration. Talented employees are looking around their organisation, and seeing others who are earning more money but contributing less. Logically, the talented employees start to feel insufficient and undervalued.

Not only is the current system stifling ambitious employees, it’s also an outdated way of thinking for some sectors. For example, in the tech start up industry experience and years of service is becoming less and less important. In the tech start up industry today it’s not about what you knew yesterday or a year ago, but about what you know today and how you act upon it. As experience becomes less relevant it makes little sense of adopting the current compensation system, and I believe it is time to speed up the process of change.

TIME FOR A CHANGE

In order to address the issues laid out above, it’s imperative that organisations start moving away from coupling compensation with years of service, towards a system of contribution-based pay. Although contribution-based pay is a rather broad term, I specifically refer to coupling compensation to the added value of employees. For years we’ve adopted the same work system and it’s time that working systems also progressed towards more modern labour relations. I strongly believe that shifting towards a system of compensation and added value is a step towards a more modern approach.

In order for this to happen it’s imperative that organisations address the topic of demotion. Rather than adopting a stance of avoidance when it comes to demotion, organisations should confront the subject. Surprisingly what we’ve found at Effectory International is that honest conversations about added value can be a liberating experience for employees.

Most importantly for organisations and employees, when a contribution-based pay system is adopted, the gilded cages and frustrations that currently accompany years of service based pay, will cease.

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