Archery is an interesting sport. Great archers hit the center of the target nearly every shot. For those of you who have never shot a bow and arrow, you might be surprised that to hit the target you have to aim somewhere else. Sometimes you must adjust for the wind. Other times you must adjust for altitude. Even on the calmest days at sea level you need to aim higher than the target, just to account for gravity. A key aspect of archery is that you perform in solitary manner. You stand still, focused only on yourself and the target. Silence is the rule and distractions are things like your heartbeat and the need to breathe. Your entire focus is on the center of the target. It draws your eye and arrow.
Compensation is just like this. Except instead of solitary, calm, silence while you shoot, you have other companies aiming arrows at you and your target. Changes to the market are constant, noisy distractions. To make matter worse, we often put our bull’s-eye away from the center of the target. It seems we actively work to make a difficult task even harder.
The 75thpercentile has become almost mythical. Targeting pay to the upper quartile shows you are leading your industry and attracts high-level staff. It proves your management is better than your peers. These are facts. We know these are facts because consultants have said it for years and it seems like “everyone is doing it.” Perhaps, just maybe, we have this equation wrong. Should more companies be aiming for the middle and adjusting as warranted?
Aiming somewhere other than the middle of a target makes the task of hitting the target more difficult. It also leaves far less room for error and adjustment. More problems crop up if everyone starts aiming for the same off-center section of the target. First, there may not be enough room for everyone’s arrows. Second, the new smaller area becomes the standard. Eventually targets will be moved so that the center is located where people are aiming. Once again, archers will aim for the 75th percentile and the target will be moved to accommodate them. In the end, the target is so far away from its initial location that poorly shot arrows end up hitting spectators and causing real liability insurance issues.
You can see how in my totally not exaggerated example that this can lead to some dangerous results. But seriously, making the 75th percentile your stated goal can, and has, lead to unwanted consequences. We tend to forget that if we have already limited our peer group to 20 companies very similar to ourselves, we have already defined our target away from the real center. We tend to forget that basic math requires the 75th percentile to go up for every year a majority of companies are above the 50th percentile.
In other words, if even a few peers follow your lead and target the 75th percentile an equal number would need to aim for the 25th percentile just to keep things centered. We know that won’t happen*, which means our target will continue to move until we are no longer spending our compensation dollars safely. It’s time we reevaluate the mythical 75th percentile and determine if evidence shows that has served a purpose or if it has just been a distraction that has made us miss our real target of effective compensation.
*I don’t know about you, but I haven’t seen too many compensation philosophy statements that read: “In an attempt to stay a poor performer in our peer group, we aim to pay our staff in the bottom quartile whenever possible.”