From the April 2012 issue of Investment Advisor • Subscribe!

The Dangling Conversation

Failing to confront compensation disappointment head-on usually results in misinterpretation and miscommunication

Employees tend to view the amount they are paid as a statement about their value to the organization, rather than a reflection of the firm’s financial situation. In difficult economic times, this makes for an uncomfortable discussion with employees who also face financial pressures of their own. No matter what the firm’s management says about the employee’s value, each person has an expectation of what their compensation should be.

Having been both an employee and an employer, I can empathize with both sides of this dilemma. In my earlier days, I recall having fits of rage about my compensation, certain that if it were not for me the company would falter. When I became a manager I tried to reason with employees who threatened to leave because of dissatisfaction with pay raises and bonuses. While having points of view derived from different experiences may disqualify me for public office, it certainly helps shape my thinking about conversations with staff.

We strive for clear communication, but when it comes to compensation, employees often stew while employers grow resentful. Despite our best intentions, the dialogue can fail when each party talks past the other, convinced that their position is right and the other is wrong. Emotions run high yet neither has the courage to air the issue face to face.

This uncomfortable dynamic leaves many employees feeling taken advantage of and defensive, ready to fight for their hard-earned income. Meanwhile, stressed-out managers wonder why their staff can’t live on what they are paying them and get angry that employees seem to be focusing on themselves instead of the bigger picture. When suspicions and assumptions are allowed to brew, bad things happen.

The solution to this communication dilemma is to engage deliberately, clearly and without equivocation. Do not have this conversation via email even if you feel you’re a more articulate writer than speaker.

Recently, an advisor sought counsel from his Pershing relationship manager on how to get back on track with an important employee who was feeling undervalued. While this advisory firm is successful, it is still regrouping from the meltdown of 2008. It has had to manage costs and redefine the business in order to get back to the level of profitability it once enjoyed. The advisor shared an email he received from a key person in his firm after a review of compensation. The advisor had given this employee the highest percentage raise, the largest bonus as a percentage of base and some additional units of ownership in the firm.

The employee’s email said, “The pay raise you gave me, considering real inflation, means I am effectively flat or down from last year, and the bonus after tax gives me very little to cover the kids’ school let alone help pay my mortgage or put anything into savings. I literally switch the lights on in the morning and turn them off at night. It doesn’t feel right to have people like me who are passionate and committed to transforming this firm be given this kind of poor recognition. It is very demotivating.”

Wisely, the leader of this practice took a breath before responding. While instinct urged him to fire off a response attacking his employee for being ungrateful, he realized there was more to the story and more to be accomplished by having a reasoned dialogue—in person. He crafted a script of what he wanted to say, then invited the employee into his office for a conversation. Following the bullet points he had developed, the leader addressed the disgruntled worker:

“You’ve been put in a position structurally to see your income rise faster than most others. And you are being recognized for the long hours, hard work and leadership that you are providing by being given greater responsibility. Obviously, this also comes with more pressure because you’re the one who has to show courage, vision and maturity for others in your group and in the firm more broadly. Progressing from associate to principal is one of the hardest transitions because the downsides are bigger in tough times, but so are the upsides.

“Our reality is that none of us is making the same kind of money we were making a couple of years ago and our costs continue to rise faster than our revenues. That said, we gave you a bigger increase in base and a bigger relative bonus because of your value to the firm. And we gave you stock so that you could participate in the growth you are helping to create.

“What I know is that any one of us could leave for a bigger bump in short-term income because other firms covet us. But there are few opportunities to build a business with people we like, as we all have now. So while I’m very sympathetic that the amount of the bonus is not what you would like it to be, under the circumstances I think it’s important that we put the recognition into context.

“There may be nothing I can say or do that will make you feel happy about the amount that you received, but you have to know that there is no person who has more support from the leadership of this firm than you and no one who is viewed with as much potential to make an impact as you.

“Like an entrepreneur, you are building a business almost from scratch, and this effort requires a fair bit of sweat equity. I just hope you believe that with your continued growth and with my help, this is a dream that’s going to be fulfilled in spades. While the amount today is not what you had hoped for, it is still pretty decent compensation all things considered and is merely a down payment on what I think is going to be a very financially rewarding career here.”

By acknowledging the pain and anxiety that the employee is experiencing, but also painting a picture of where the firm is going and what that person’s role in it will be, this manager was able to reset the conversation around the opportunity rather than the perceived slight.

The manager also used this conversation to gauge the employee’s response. Would he remain petulant and pouty, or would he put the venting of anger behind him and move forward as part of the team? This exchange never could have been conducted by email without emotional language and miscommunication.

Of course, there is no guarantee that such frankness will produce a turnaround in attitude or behavior, or that the employee will buy into the vision that is being presented. But you always want to know how people deal with stress and who will be able to think and act like an owner so you know who to invest in and who to cull from your payroll.

Managers earn their rewards during volatile and challenging periods. Anybody can lead in good times. When times are tough, true leaders know when and how to have the difficult conversations that keep their colleagues and associates focused on the mission, rather than consumed by their personal agenda.

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