Every company pays people. How strategic can it be?
One strategy: pay everyone a lot of money. In theory, money buys the best talent. In practice, it may just buy expensive talent. What kind of people does a company with huge pockets attract? (And don't forget: Amazon.com's Jeff Bezos says frugality helps to drive innovation. For my money, Amazon.com is the most innovative large company today.)
Lots of Wall Street firms have paid lavishly for short term results. What kind of behavior did such a pay system encourage?
Many companies just pay people the going rate when they're hired, and then hope to keep raises down. Eventually, current workers can earn more money by quitting and applying for the open positions. What kind of people stay at a company that pays them less than new hires, who know less than they do?
As I've written about before, a system like Fog Creek's tries very hard to signal that merit will drive all pay, by being as explicit as possible about the differences between levels. Everyone makes the same as everyone else who works at the same level. What kind of incentives are created when a company focuses so intently on merit?
At companies like Google, the differences in levels may not be as specific, but in order to get to the next one, employees have to "apply" for it. This involves writing a resume and gathering letters of recommendations from others in the firm. Anyone can nominate themselves, and one's manager cannot prevent it. What kind of message does the company send to its employees about who is responsible for their career? What kind of people would be attracted to such a system?
In the end, a company's strategy relies on having the right people to identify, develop, and execute it. To tweak an old saying, a company full of guys carrying hammers will see everything as a nail. A company's compensation system attracts people with certain tools in their toolkit.
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