Flatter, less hierarchical, organizational structure has been achieved by some organizations, is being attempted by others, and is the competitively driven ambition of virtually all of the rest. The obstacles to reducing hierarchy are numerous. We want to zero in on just one of these: compensation.
Organizational hierarchy and compensation design tend to reinforce one another. Job hierarchy, for example, is the backbone of most job evaluation plans - as revealed by such evaluation factors as: level of authority and scope of responsibility. This hierarchy of reporting relationships, or power pyramid, is clearly mirrored by the pay pyramids revealed in compensation survey data.
Incentive plans (both cash and stock-based) also tend to be shackled to job hierarchy; as are a variety of perquisites and executive benefits.
In short, organizations struggling to reduce managerial levels, or attempting to organize around teams and to empower employees, find themselves wrestling the pyramidal forces of their own pay plans.
Where the reward system is wedded to the traditional pyramid, vested interests to be so entrenched, that profound organizational change is quickly relegated to the never-will happen-here heap. Or, what is called 'major change' gets defined in terms of what is acceptable and feasible.
Our experience shows that compensation need not always be a fire-breathing dragon guarding the status quo. With the determined aim of reducing hierarchy, organizations can find approaches that will align their compensation plans with organizational strategies... enabling greater flexibility, teamwork, innovation, and the achievement of many other goals.
In a nutshell, successful change strategies of any type, especially those aimed at flattening hierarchy, must encompass assessing and redesigning, as needed, the organization's approaches to pay.
We have found, in our practice, that such compensation design efforts call for thinking outside of the traditional compensation 'box.' Success requires 1) achieving a clear picture of the organization's culture and design as it is and as it is envisioned; 2) understanding the organization's strategy and transformation objectives; and 3) shaping reward systems to serve organization design aims.
Before anything can be accomplished, management must come to grips with the interconnectivity of competitive strategy, organization design, and compensation in all its forms. Armed with a willingness to go beyond the thinking of yesteryear, organizations can free themselves from pay programs that, by design, promote and perpetuate pyramidal organizational architecture.