I was reading a Facebook message a parent posted about their kid’s physics homework and it resonated as a reminder for the compensation world. The question was how do you explain the differences between speed, velocity and acceleration. A few years ago, I wrote an article about Newton’s Three Laws of Compensation Motion and I guess it’s time for another physics lesson. Speed is a point on a graph. It tells you a whole bunch about an instant. Much of the data we use in compensation is like this. We know exactly the amount or percentage, but we have little information regarding the path to that point. We feel like we somehow already have this information, but in most cases it’s a deception. Most pay data provides as little information as the speed of a car in a race.
Velocity combines an amount and time to provide a snap shot of direction and movement over a given period. Over long periods, velocity communicates far more than speed. It gives us a better idea of the current path and some indication of where we are going. But, again, velocity can be deceptive. While your average velocity on the highway may be 65 mph, your instantaneous velocity at any given point is likely slower or faster. This is why you need to occasionally press or release the accelerator while you work to stay the posted speed limit. Velocity also does not provide any insight into whether things are speeding up or slowing down. It is like some of what the compensation industry considers to be “better” pay data. Whether you are looking at survey data or “industry trends”, most of what we get is a velocity with no indication of the forces behind it.
Acceleration (and deceleration) is where the real action is (we will save kinetic energy for another day). Acceleration is the amount of change in velocity. This provides a more complete view of what has happened and what may occur in the future. Consider the following charts using the same data set.
The first chart shows the speed of two cars that are 75% through a race. Boring and not informative.
The second chart illustrates the velocity of the same two cars at equal time and point in the race. Better, but no context for how they got here and how that may impact the finish.
Chart three shows the acceleration of the cars at the same point. Now you know who will probably win and have an idea of how the race will progress.
The data on all three charts is accurate, but it may not be correct. Information must be simple, visual, compelling…and useful. The first chart shows almost nothing useful. With the second chart, it can be easy to jump to the wrong conclusions. The third chart finally provides insight and understanding into where each car will potentially finish the race.
Compensation planning and communication require the third chart. We are not simply dealing with a point in time or an estimate of consistent movement. Pay is moving constantly and we should be able to make that crystal clear for everyone involved. If you don't understand the acceleration or deceleration of your pay programs then you don't really understand them at all. What are your thoughts?
Dan Walter is the President and CEO of Performensation and is committed to aligning pay with company strategy and culture. Grab a copy of Dan’s new comprehensive issue brief, Performance-Base Equity Compensation. Dan has also contributed to “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. And if you’re still not sick of Dan, he has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.