“Potential” is a word that’s always been favorable in the workplace, suggesting future growth and possibility. On the other hand, it’s one of the most complicated concepts within the world of compensation.
Paying for potential can appear to make a lot of sense at first glance, like when a supervisor observes a highly talented and eager person on their team. Naturally, the organization will want to retain them before someone else snatches them up, making a preemptive salary increase or promotion seem like a smart future investment.
The major dilemma here is that as we will discuss, compensation adjustments don’t usually work out unless they are firmly grounded in the present.
Potential Does Not Equal Performance
As compensation professionals are acutely aware, pay structures must always account for job scope, market value, internal equity, skills, experience, and performance. These are all objective, measurable details. Potential, however, is completely subjective information – something that does not mix well with compensation.
With that said, potential doesn’t need to be ignored, but it should be dealt with delicately. When potential does happen to become such a large factor that it must be considered, it doesn’t take long for fairness concerns to come out of the woodwork. You could easily find yourself facing a situation where one worker gets a larger raise because management views them as “on the way up,” while someone else currently performing at a higher level receives less because they are seen as a steadier asset with little room for growth.
From an objective standpoint, this could never be seen as fair and sends the wrong message to employees.
The Risk of Subjective Pay
As stated previously, paying for potential is a highly subjective concept that is often influenced by supervisor preferences or familiarity biases. Walking the walk may mean much more than talking the talk, but even so, those who express their ambitions often may give off the illusion of having more potential, when in reality they are all talk with no results. Meanwhile, more modest employees who do superior work might be passed over if they don’t immediately present themselves as an effective leader.
These are the scenarios in which the compensation team needs to act by focusing more on what the company is truly trying to invest in. Important considerations include whether the employee is currently operating at a high level, if there have been major changes in scope or the job itself, how valuable their skills are, what the retention concerns might be, and factoring in concerns regarding the adjustment being temporary vs. long-term or related to a promotion.
Recognizing Potential the Right Way
If you want to recognize potential in a fair and effective manner, the key is to align that potential with a solid plan. For an employee to be considered prepared for greater responsibilities, there needs to be a clear definition of what that preparation entails. This outline should include their exact proven capabilities, an understanding of what duties will be added, a practical timeline, and a determination of the compensation adjustments that will be made once these goals are reached.
The benefit here is that it elevates the discussion from simple commendation to something more tangible and motivating. In addition to the knowledge that management believes their career has a bright future, the employee will also have a much better grasp on what they need to do in order to transform that potential into a promotion or a raise.
The Compensation Behind the Curtain
Compensation is never vague; it always needs to be defined with clarity. While every little thing doesn’t necessarily need to be scrutinized, the reasoning should be strong enough to support pay decisions.
In situations where these choices depend on hazy guesses regarding possible outcomes, endorsing them in good faith becomes nearly impossible. However, once they’re connected to measurable details like abilities, scope, achievements, compensation data, and proven progress, they can truly have a leg to stand on.
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