Medians vs. Outliers — Comp + Coffee: Ep. 39

In compensation, we know all about the median.

We’re used to paying at the median, targeting the median — but do we spend too much time focusing on this average?

On today’s episode, we’re joined by Kim Taylor, CCP and GRP at Payfactors. Kim joins us to discuss what it means to focus on the median versus the outliers, and what a focus on each means to compensation strategy.

As always, make sure to rate and review us wherever you listen to Comp + Coffee!

For a full transcript of the episode, see below.

 

Bill: I feel like I have to apologize every time for you, Shawn.

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Shawn: And we’re live.

Bill: Hi, Shawn.

Shawn: Hey, Bill.

Kaite: Hello.

Shawn: You cut me off there today.

Bill: What do you mean, “Cut me off.”?

Shawn: I’m normally the one that says, “Hey, Bill.”

Bill: Hey, Shawn.

Shawn: Hey, Bill.

Kaite: Did you have a lot of coffee this morning, Bill, or you’re like…

Bill: I did.

Kaite: …ready?

Bill: I am ready.

Shawn: Bill’s here, Katie’s here. Special guest today.

Kaite: Kim.

Kim: I’m so excited.

Shawn: Kim Taylor.

Kaite: The returning guest.

Together: Returning guest.

Shawn: Third time, third time.

Kim: Isn’t there a name for that when you’re a returning guest star?

Shawn: Recurring role. I don’t know, you wanna host?

Kim: No.

Kaite: Kim’s busy.

Shawn: Before we get into today’s topic which is the median or the median versus the outliers, Bill?

Bill: Yes.

Shawn: Well, I wanna look you in the eye while I’m telling you this because somebody wrote in and they said, “Why is Shawn always so mean to Bill?”

Kaite: Oh.

Bill: Yes.

Shawn: And it broke my heart, Bill, I was like, “Listen, listen, we do a little in-fun, we do a little jest, there’s a lot of sarcasm, I don’t want to be mean to you though.”

Bill: Well, you know…

Kaite: Bill, do you go home and cry about it?

Bill: Not usually.

Kaite: He does, he does.

Bill: No.

Shawn: Don’t make me feel bad.

Bill: That was my fan. Remember I said my fan club of one, right in.

Shawn: Literally, my first question was, “Was that Bill that wrote that?” It wasn’t…

Bill: Oh, good idea.

Shawn: You’re gonna pay people to write in now?

Bill: No, I can do it myself.

Shawn: So, anyway, I hope you don’t perceive that I’m mean to you, Bill.

Kaite: Is this your apology?

Shawn: Kind of, but not really because I’m never mean, somebody else does.

Kaite: Do you accept? Do you…

Shawn: If you believe I’m mean, let’s have a talk afterwards, we’ll have an intervention.

Kaite: Do you accept Shawn’s apology? No.

Bill: Sure, but hey, I kind of like the idea of having an intervention.

Shawn: As you see, you have answered the question, am I mean? I don’t mean to be mean.

Bill: There’s a bunch of things that we need to intervene on, Shawn.

Shawn: Well, that is 100%, yes. But if it’s me being mean to you on the podcast, tell me and I will adjust.

Bill: Oh, no, Shawn, I’m good.

Kaite: So believable.

Shawn: The guilt will not be removed. Anyway, somebody is out there looking out for you, Bill.

Bill: Thank you, somebody.

Kaite: Meanwhile, Shawn isn’t sleeping at night, the guilt is eating you alive.

Shawn: Right. Right. I’m trying to live my life in a good way and apparently listeners to this podcast think otherwise.

Bill: But you can’t spell median without mean.

Kaite: Correct.

Shawn: Is that your tie-in for today?

Bill: I don’t know. Well, median and mean…

Kaite: That was a transition.

Bill: …they’re related but not the same. Are we gonna get into that?

Shawn: Yeah, let’s do it.

Bill: I meant that… Make it short. Great.

Shawn: And we’re off.

Bill: And this is Kim’s last episode.

Shawn: Well, I think there’s a couple of ways that you can look at today’s topic, and we’ll see where the conversation goes, but I think it all ties together where, specifically in compensation, we look at are we paying at the median? And then the conversation always turns to, “But what about the outliers? What about your high performers? What about those?” I think it came up on a recent one, Bill, that you cited, what about those that might not have the skills to be the median, right? And they’re gonna be the other way, an outlier the other way than we would typically associate with. But this can… In my mind, this also conflates with performance. How do you treat your high performers that have those valuable skills versus those that are at the mean, the average employee? So a lot of different ways the conversation can go today, but does that make sense that these things tie together?

Bill: Sure. Kim?

Kim: Works for me.

Shawn: So maybe let’s start at the most direct way, which is when we think about comp and the talk goes to paying at the median and we know the vast majority of companies that we encounter pay at the median, they target the median. Why is that the case? And then why does the conversation always shift to except for those instances where I don’t wanna do that? Why do we not take a more thoughtful approach to it?

Bill: I think that the median is where you start not where you end, you know, and it’s like it’s the point that your salary structure is anchored to. But I think sometimes because we are working too fast, or because it’s too hard to differentiate, or to, you know, take money away from one person to give it to another, you know, we tend to keep people clumped together around the median more so than their pay can be, I guess, less distributed than their performance levels or their…you know, what their value to the organization is.

Shawn: Meaning that if somebody is a high performer and you look at, say, for example, their cost of living allowance, the high performer might get a full 3%, the low performer, is that what you’re saying, might get…

Bill: Well, that they… I mean, that if everyone in that job is to average 3% salary increase, you know, the high performer may get 5 and the low performer may get 1.

Shawn: I was gonna say 3 versus 1, or whatever, but yeah, that exact same thought.

Bill: And I think, you know, recently we had a related discussion where it was we were talking about, you know, how far above the average the high performers go and, you know, how much does that take? And in some cases, it’s gonna consume your entire budget. You know, you have to pick and choose who’s gonna get rewarded and how.

Shawn: But doesn’t it depend a bit on your philosophies? Mike Zani from PI was on here saying that he still believes his arbitrage, if he tries to hire performance at the 90th percent, right? So these are the top 10% of people that I can hire for this role and pay them at the 75th percent. And he’s saying that he’s getting arbitrage through that then.

Bill: He’s gaining arbitrage, like, he’s gaining leverage.

Shawn: Yeah, exactly. He still makes out in the end because the productivity that they add is more than what he’s gonna pay them.

Bill: And, I guess, implicit in that is the people that he’s bringing in are not being paid currently at the 90th percentile, they may be deserving of it but they’re not getting it, so they’re willing to take an upgrade to the 75th percentile…

Shawn: Correct. So, my point is that, are we anchored in the wrong strategy? Do we spend too much time focused on that median and not on the outliers? Should we be spending more time on the highest performers?

Bill: I definitely think we should be spending more time on the highest performers, and we should also be…I’m scared to finish this sentence because I’m gonna get into a place where I can’t solve the problem I’m creating.

Shawn: Let’s go.

Bill: It’s like we should understand the return on compensation for those high performers. So, back to your example, Shawn, or the Mike example, Mike Zani example, is if I can get a 90th percentile performer for the 75th percentile, I’m paying above what my theoretical budget is but I am, hopefully, getting a whole lot more value. So, the return on the extra dollar spent should be pretty high. But how do you measure that?

Shawn: That would be the next question, how do you know you’re getting a 90th percentile?

Bill: That was the problem I was getting into that I couldn’t get out of, I’m now painted into a corner. Kim’s gonna bail me out.

Kim: Well, no, I was just thinking, how do you get to that point? Because, first of all, performance management is so hard, like it’s really hard for companies to do it and feel confident that they’re doing it accurately. So, I would question whether most companies even feel like they know who the 90th percentile performers are, and then how do you get them to the 75th percentile? Because to your point about the merit budgets, if you give somebody 5% because you think they’re a high performer, you have to take it away from somebody and that’s a really uncomfortable conversation to have.

Shawn: You have to take it away from somebody. So you are approaching it with, “Here’s your fixed budget for this,” not necessarily everybody can get 5% raises.

Kim: Right, exactly. You know, I think most of my clients will come out with a 3% budget, and if you wanna give somebody 5%, that means somebody else has to get nothing, you know, you don’t spread your 3% and then come up with a couple extra percentage points.

Shawn: That’s right. In the Mark Szypko episode that’s what we talked about. He was like, “If you have, say, 10 people, and you wanna make sure that you’re rewarding your high performers well, you can give them a 10% raise and then the rest get little or nothing.” Right? One extreme of that.
Kim: Yeah. But I think that’s easy for us to say, I think in practice it’s very, very hard to do. I wouldn’t wanna be the manager that tells my average or slightly below average but still solid performer that you’re not getting anything.

Bill: Exactly. And that’s how you end up with that…

Shawn: Two point eight, 2.9, 3, 3.1.

Bill: Right, the compression issue.

Kim: Yeah, it’s just easy. It’s easy to give everybody 3%.

Bill: It’s less confrontational.

Kim: Right.

Shawn: But okay, is that what’s right for the business?

Bill: It could be actually, but I think, more often than not, no.

Shawn: It could be in the sense of consistent productivity or predictable productivity?

Bill: Predictable productivity and keeping your current workforce happy. Although, I don’t know that people are generally happy about their 3% raises or, you know, modest bonuses, you know, people like that, you know, big payday or a big bump.

Kaite: But what would you rather…would the people rather a big…a somewhat often, like, I don’t know, I’m not saying every year but, you know, every few years you get your one big bump for assuming you’re a high performer, and maybe the other years you’re not getting anything, or you don’t even…

Bill: You know, I sort of know what you mean. No, the people want their…they want to be recognized and rewarded frequently. And, you know, I think it’s not perfectly clear, but it seems pretty clear that younger generations like to be recognized and rewarded more frequently, not less frequently. I think there’s also a challenge, you know, we talk about 90th percentile performers, nod to Kim, whatever that means, or however you measure that, but cause some more problems and say what makes…not all 90th percentile performers have the same impact on the organization.

Shawn: If you’re a 90th percentile accountant, it’s not gonna have the same as a 90th percentile salesperson.
Bill: Correct. And so, you know, who…you know, back to the, I guess that’s a return on compensation, back to that concept of, like, where can you spend your compensation dollars to get the best impact for the company?

Shawn: Well, so the question would become…if I can throw a variable in there because, apparently, we’re just operating in theory today and so what we’re gonna do…

Bill: Actually, I’m secretly hoping, by the way, that my one fan is an accountant and that he or she’s gonna write in again. Sorry, Shawn. Go ahead.

Shawn: I’m trying to be nice, Bill. I’m doing my best.

Kaite: It’s hard tough, right?

Bill: Keep trying, keep trying.

Shawn: Harsh crowd. Maybe I’ll get the sympathy emails. If there are things that are immediately measurable, right? Anything around growth, for sure, anything…right? So, new revenue coming in, right? That’s easily measurable and easily associated or attributed to the last touch, the last thing that, right, the salesperson that brought it in. But every company cares about growth, they care about cash, they care about market share, they care about profitability, right? Maybe one or two other things depending on your organization, but generally that’s it.

Bill: Product, you know, whatever it is they’re…

Shawn: Of course, right, and product has to define all of it. If you don’t have a good product, now that stuff’s gonna in the right direction. But you need all those underlying services and support to make sure that that is all, like…okay, let’s use that accountant example. So, now I’m gonna turn around at the accountant. This is so much empathetic to me.

Bill: You shouldn’t change the whole discussion just so that you get good feedback, Shawn.

Shawn: But if you not get… So the deal’s closed, and you’re not getting receivables in the time that you’d like them to be. You need a 90th percentile or that theory that’s gonna close that gap and make sure that your cash is coming in when you expect it.

Bill: Right. And if that person’s doing that and, you know, cash flow is an issue for your organization, then…

Shawn: It’s valuable.

Bill: That is valuable. And as it becomes more valuable, you wanna reward that person more. And, you know, we’re sort of kind of bouncing back and forth between, you know, more compensation, more base pay, and more bonus or more recognition, you know, and I think that some of these things are actually more sporadic and less recurring. So, you know, as something becomes more important, you can come in and say, “Wow, we really need you to double down and focus hard on collections.”

Shawn: Right, right, you can incentivize that direction then.

Bill: But, you know, people get addicted to that. A whole other topic is, you know, never pay the same amount of bonuses to people every year, because then it becomes an entitlement. You want people to…

Shawn: Right. We’ve had that [crosstalk 00:13:58] bonuses now, your raise is now a bonus. I guess, what I’m having trouble trimming up in my mind and I look the room on this is we have companies out there that every single one of them will say, “I wanna be an employer of choice. I wanna retain the best employees here. I wanna attract others that are like variety, but I’m gonna pay them like I pay anybody else.” So, why do we center this conversation around the median as opposed to maybe taking a differentiated approach? Why would you not focus on, you know, the high performers or in Jack Welch’s approach, and we’ve had talks loosely about this too, cut that bottom 20%?

Kaite: How do you, like…

Shawn: Like, how do you become an employee of choice when you’re doing what everybody else is doing? Why wouldn’t you anchor the discussion in something else, I guess is what I’m asking?

Bill: I think it’s because…this is where the, you know, rubber meets the road, continuing cliche day, but, you know, like, it all has to work and you have to end up making more money in order to do that. So, you know, it’s like, “I want the best people so that my company can make the most money or relative to my peers so that I can pay my people more. ” And, one, you need to have the money to pay the people and, two, you have to have your systems all figured out so that that, you know, what sounds good in a PowerPoint actually works in reality.

Shawn: Yeah, right. So, by rewarding the top performers, you’re consistently getting more and getting more productivity out of them and you can tell that compared to your peer group that you’re actually doing that.

Bill: Right, by highly paying people we are going to be more profitable, have more money and, therefore, that you have this cycle of being able to continually pay people more.

Shawn: You can ball harder.

Kaite: That’s one way to put it, yeah.

Bill: I guess so. I feel like I have to apologize every time for you, Shawn.

Shawn: So, now we know how that episode starting. But yeah, so, right, it’s all in theory, but if… Isn’t all of this stuff in theory, we wanna be an employer of choice?

Bill: Yes.

Shawn: What does that mean?

Bill: But this one is, it’s a nice theory with a big price tag.

Shawn: Fair.

Bill: And, you know, if you just think about your payroll and you wanna increase it 5%, that’s a pretty substantial increase in just…

Shawn: Cost.

Bill:…cost, straight up cost.

Shawn: Cash out.

Bill: And, you know, as, you know, most people listening are gonna know, there’s all these other things that happen when you increase salary, you know, you have all your benefit costs and other costs that are gonna go up with it. So, there is a…you know, that is a pretty big impact. So, it’s not a trivial decision or…yeah, I’ll leave it at that.

Shawn: Well, so I have two questions. One, I guess, would be for you, Kim. Have you ever seen anybody that’s taken this approach meaningfully? Like, they have intended to do it and said, “We’re gonna change from, you know, whatever the 50th to the 60th because of all these things.”?

Kim: Not across the board, no. I have a lot of clients that will target the 90th for certain segments of their employee population, hot jobs, revenue-generating functions, but I don’t think I’ve worked with anyone who deliberately targets above the 50th percentile. But on the flip side, I don’t have anyone that deliberately targets below the 50th percentile either. Everybody’s really fixated on that median number.

Shawn: You basically have to plan for turnover, if that’s your model, if you’re going below, right? You have to have that almost big dinner, I’d think?

Kim: Yeah, you do or you have to know that that’s just a temporary phase and have a plan to get to the 50th in a short-term.

Shawn: So, to come back to you though, Bill, doesn’t cost go up no matter what and maybe it’s just more controllable if you predict that’s gonna be 3% across the board, then everything else is gonna be 3% for your, like, contributions to 401(k), whatever it is that you kind of [crosstalk 00:18:00]

Bill: Well, right. The median itself goes up, you know. But if you’re, you know, going ahead of that, then your costs are gonna go up significantly more.

Shawn: More substantially.

Bill: I mean, like, once you get… You know, off the top my head, I can’t prove this, but I’m pretty sure it’s true is like that if you go from paying everyone at the 50th percentile to paying everyone at the 60th percentile, you’ll have a one-time hit and then your costs are gonna go up loosely at the same rate, probably a little bit faster than the median…

Shawn: The 3% on the less…

Bill: …as a year over year percentage, but the costs are still higher, you know, and you still have to have better performance, better metrics in order to fund that or else you become the sucker of choice, I guess, and it’s like you’re losing money.

Shawn: You need to be a Google, a Facebook, an Amazon, an Apple that just…not that Amazon, probably intentionally so it doesn’t have a ton of cash or make a ton of profit, I should say, but the rest of them do. Apple has got tons of cash, like, they have a business model that just throws off cash.

Bill: Exactly.

Shawn: So, you have to be somebody like that.

Bill: And they use that to steal each other’s employees and they use it to get…hire whoever they want. Not everybody is in that position. In fact, most companies aren’t in that position. You know, another one…I can’t remember if we talked about this before, and so, like, [inaudible 00:19:26] with a few hedge funds in the past where they, you know, they were like…

Shawn: Doesn’t matter…

Bill: …money at the salary level is not a big deal and they’re just happy to pay…to, you know, be an employee… I mean, they’re literally being an employer of choice. “You know, we don’t want you to ever think about leaving and we’re going to pay you way more than you’ll get anywhere else.”

Shawn: And for that always that’s because you’re sold, right?

Kaite: I’m just thinking that.

Bill: That’s not nice.

Shawn: It’s beginning, I didn’t know. So, one other question I’d tee up then is aren’t we inherently focusing on the outliers when we say, “I pay at the median, but for engineers of this talent, for nurses with this skill, for truck drivers with this certification, I’m gonna pay a little bit more because it’s more meaningful to me at this time.”? So, aren’t we inherently shifting our focus away from the median? And the next part of that question would be, shouldn’t we kind of view everybody that way to the extent possible?

Kim: Well, I think sometimes you choose to target the higher percentile because it’s hard to get talent in those particular jobs otherwise. So, it’s not so much that you’re focusing on them because they’re special, it’s more like they’re the squeaky wheel. And so, you gotta have somebody, you need a warm body. And if I can get away with only paying my accountant at the 50th percentile, I’m gonna, you know, hang on to that extra dollar and use it to get an engineer down the road.

Bill: Right, do you wanna get away with things? You know and…

Shawn: Or have the strategy.

Bill: …you know “run the risk,” right? Or be proactive and, you know, make it instead of… I think the way you described it, Shawn, is you make an occasional exception for either, you know, the squeaky wheel or, you know, the handful of people that somebody panics about, or do you have an actual rule, or is it part of your plan and your philosophy to pay outliers accordingly, appropriately, differently? And maybe you do maybe you don’t publish it, you know, widely that that’s what you do because more often than not, it would be…

Shawn: And everybody would be an outlier.

Bill: Exactly.

Kim: No one wants to be average.

Shawn: So we’re all average and we just need to accept fate?

Bill: The lake would be gone?

Kim: Pretty much.

Shawn: Keep toiling away. Cool. Boy…

Bill: A podcast killer.

Kim: But no, they don’t publicize it. I don’t even that they oftentimes will acknowledge that they’re doing it, it just sort of happens.

Bill: Even with the recipient?

Kim: Oh, definitely not with the recipient, because once it leaves HR, once it leaves compensation, it’s out there, you have no control over that anymore. So, I’m not gonna say, “Hey, Bill, you’re an engineer, I’m gonna pay you at the 90th percentile,” because you’re gonna go tell Jeff and you’re gonna go tell Ben, who aren’t engineers, but then they…

Kaite: Then they expect that…

Kim: Exactly.

Kaite: …and wonder, “Why am I not getting paid that way?”

Kim: Exactly.

Shawn: But isn’t this where you need a code in the system for it every time? Like, isn’t there basically some kind of documentation around this?

Kim: No, I think you’d be surprised at how loosey-goosey people are where they just say, “That for me is over the max, that’s okay.” I think that sometimes they won’t even admit to themselves that they’re doing this. It’s not a formal philosophy, it’s just something that happens.

Kaite: What about in that situation where Bill’s at the 90th percentile but Shawn, who’s on his team and is also an engineer, is not and then when they have a conversation…I mean, now I’m getting to a whole another topic.

Shawn: If we were to be the same, doing the same job duties and have the same skill level and all the same stuff?

Kaite: But you’re not on the 90th. Like, if he’s getting paid in the 90th…

Shawn: He is a high performer.

Kaite: …but he is a high performer, yeah, and you’re just like, you know, you’re mediocre.

Shawn: We’re just applying new titles but it’s the same thing.

Kaite: Yeah, yeah.

Shawn: It’s fine. It’s fine. All of a sudden we’re engineers

Bill: Wink, wink.

Shawn: Well, that would become a fair pay thing depending on if the job is the same performance is the same, right? That would…you’d have to be able to prove a case for…

Kaite: I guess, I’m always curious, like, how…with all this…and I know we’re getting down the fair pay track, but, like, with all these parameters that are now in place, like, how…I think I actually asked in the last…

Kim: Why even bother differentiating pay anymore at all, like?

Kaite: Kind of.

Kim: Yeah. No, I know,

Bill: I mean, I definitely think we’re gonna see a whole track of companies that are, you know, just bands of bass but, like, every, you know, 10k or 20k, you know, you’re, you know, you’re a 40k a year you’re 60, you’re 80 and make up the difference in a bonus, and, you know, move on based on a legitimate performance-based bonus.

Kaite: Got it. Got it.

Bill: But I think that the issue, that like Kim pointed out, is one where, you know, it’s easier to not have that conversation than to have the conversation and say, “No, you’re not a 90th percentile performer and this is what you should do to become one. You know, here are your strengths, here are your weaknesses. You know, keep your strengths make them a little better and, like, address these weaknesses.” And that we have standards.

Shawn: Use the gap to be fair.

Bill: Right.

Shawn: If you can do this, you can get there.

Bill: Right. And, you know, sort of it’s not easy to have that conversation with people, but I think once you start having those conversations and have them…

Kaite: Not just around reviews.

Bill: … more like more frequently less, you know, there’s less pressure, less intensity and, you know, it’s just it goes from being a performance review to being coaching. And people, you know, I think, respond better to coaching.

Kaite: Oh, like this is just how we have our one-to-ones or whatever, yeah, yeah.

Bill: Right.

Shawn: So all average but…

Kaite: Except for Bill.

Shawn: The certain few can stand out.

Kim: Some are more average than others?

Bill: Isn’t that “Animal Farm”? The eagle likes to ask people about their favorite books.
Shawn: This is sounding very much similar to that with us, what was it?

Bill: All the animals are equal and the pigs are more equal, something like that. Anyone? Anyone?

Shawn: Sounds right, it’s taking me back to, like, high school English. Yes.

Kaite: The pigs take… Tess like creepily whispers behind us, “The pigs take over.”

Shawn: It’s making me feel like we have a very dystopian future ahead of us. A rule of concern for everybody here but hurray, well, we’ll leave it on that note.

Kaite: It’s been a cheery one today.

Shawn: It has.

Bill: Did we accomplish something?

Shawn: I don’t know, anything else we should talk about in terms of median versus outliers here?

Bill: I think we should go back to, should go back to Shawn’s book thing and, you know, people should read the Malcolm Gladwell’s book “Outliers.”

Shawn: It’s true.

Bill: It’s interesting read and relevant.

Kaite: Is that already on the list?

Bill: It should be.

Shawn: I think one of his other one came up the…not “Outliers.”

Bill: “Tipping point”?

Shawn: “Switch.”

Bill: “Blank”?

Shawn: “Blank.”

Bill: “Blank”?

Shawn: “Blank.” And “Blank” came up.

Bill: I think “Outliers” is more…probably more appropriate for…it’s a better fit for the audience.

Shawn: It’s a book recommendation for the week.

Kaite: Added to the list.

Shawn: Well, thank you, Kim, for joining us today.

Kim: Thank you.

Kaite: It’s been fun or maybe?

Shawn: Bill?

Bill: Shawn?

Kim: Always fun.

Shawn: Thanks for operating in the abstract theory with me.

Bill: Anytime.

Shawn: There’s a reason you majored in math, I don’t get the theories. I don’t get the theories.

Bill: I do.

Shawn: You do.

Bill: I do.

Shawn: I know.

Kaite: I definitely don’t.

Shawn: No. Mine doesn’t work that way. All right, well, till next time, adios.

Bill: Over and out.

Kaite: That’s my line.

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