Letting the Air Out of Title Inflation

Letting the Air Out of Title Inflation

March / April 2009 BY WARREN ROSENSTEIN
WARREN ROSENSTEIN is head of client business analysis at McLagan, a financial-services consultancy and subsidiary of Aon Consulting based in Stamford, Conn.

In a year when most companies will struggle to deliver bonuses that resemble the amounts paid at year-end 2007, or even 2008—both of which now feel like a long time ago—many managers will be tempted to grant promotions in lieu of pay. It’s an easy move that makes everyone happy, one with few costs other than a couple of boxes of new business cards. Right?

Wrong. Companies have employed this seemingly harmless strategy since they began etching executives’ names on office doors, and all the evidence points to very real and negative results. Title inflation throws off a company’s balance, producing an excessively senior staffing model, one whose top-heaviness generates tensions and gaps in responsibility. People who insist they’ll be satisfied with a no-raise promotion soon aren’t.

Even the psychic benefits of opening those boxes of fresh stationery, emblazoned with a new and longer title, carry a downside.

First of all: Title inflation doesn’t come only from those promotions in lieu of pay. Yes, that phenomenon does exist, and under financial strain managers are increasingly tempted. In some cases, companies do promote employees when they have to deliver a tough compensation message, with the hope that the recognition will take some of the sting out of a disappointing bonus conversation.

And firms sometimes give promotions so that when a relatively junior employee attends a meeting, clients will believe they are in the presence of someone more experienced or senior. This can have a set of consequences that are outside the scope of this article, but it is clear that stamping “VP” on a business card carries only so much weight in convincing a client that it is getting serviced appropriately.

But the simple truth is that title inflation often happens simply because no one is keeping track. Firms promote staff without measuring how top-heavy they are becoming; sometimes they find themselves with staff significantly more senior than their competitors’, creating enormous pay pressures.

Indeed, the greatest and most obvious consequence of title inflation is that with more senior titles come higher compensation expectations. Even firms that tend to pay below typical market rates per corporate title still wind up overshooting on pay decisions when they have title inflation.

Consider a hypothetical example of two companies: Firm A is a reasonably staffed group, with an efficient mix of senior and junior staff for the line of business in which it is engaged. Firm B has the same revenue as Firm A, transacting basically the same business and paying the same rates per title . . . but its people have slightly loftier titles, so in year one of our comparison, they require more compensation dollars.

Firm B’s management keeps a close eye on its funding rates and decides to lower its individual pay 10 percent in year two, since it lacks the revenue to support the aggregate compensation dollars. To alleviate anger at the pay drop, top managers dole out a couple of extra promotions.

Even dropping most people 10 percent and paying the newly promoted officers less, Firm B’s profitability improves only marginally. In year three, things go from dysfunctional to worse for Firm B. The top-producing managing director is unhappy because he is getting paid below the market, and he leaves the firm. Revenue falls in his absence, there is less money to go around, and the pattern reinforces itself. Firm B offers some additional promotions, drops everyone 15 percent, and sets the stage for another top producer to defect.

The cycle winds up repeating itself, and Firm B winds up with a staff of employees who feel unmotivated because they believe they are being paid below market rates for their titles—even though they don’t deserve those titles to begin with. And Firm B can no longer afford to hire the top talent that can bring in revenue, because so much of its bonus pool is tied up with over-titled staff. It’s a vicious cycle that cannot end well for the company, its employees, or its shareholders.

Beyond the concern of top talent leaving over uncompetitive pay rates, an additional morale factor is that of high-potential junior staff. These employees join a firm with hopes of rising through the ranks and seeing progress in their career paths. When these junior employees become aware of the bloat of over-titled senior staff, they are—understandably—discouraged, finding it hard to imagine making real headway in the organization. Savvy and ambitious junior staffers aren’t satisfied with meaningless promotions that leave them with no more responsibility or genuine status.

As for less hungry employees: Firms plagued by title inflation often have little turnover among low performers who are over-titled, since no one else wants them at their asking price. While having long-tenured staff with institutional knowledge and relationships is a goal that HR professionals seek to attain, there can be a stagnation of ideas associated with a top-heavy organization that has little infusion of new talent.

What if it’s too late? What if you’re looking at a surfeit of VPs and senior VPs and senior executive VPs and can’t figure out what they do all day? It’s a daunting problem, particularly to HR and business leaders who inherit the situation. But there are techniques to manage this problem out of the organization:

  • Stop the problem at the source by tightening up the promotion process. Manage to promotion caps, derived from market data on title ratios per line of business/region, designed to normalize the title pyramid in a fixed number of years.
  • Firms with global processes tend to have less title inflation. Manage to global caps.
  • Firms with a more centralized process, across divisions, tend to have less title inflation. Manage across divisions.
  • Develop internal criteria for each corporate title. For each business area, develop additional criteria—for example, have a level of risk managed for each trader, or a level of assets managed for a portfolio manager.
  • Develop a list of employees who are clearly lugging around inflated titles. Review job responsibilities and benchmark their pay rates to market data based on their responsibilities, not their titles. Adjust their incentive-pay rates to market-driven rates based on responsibilities. And challenge these employees to grow their performance to match their titles, or make their pay commensurate with the job they are really doing.

Title inflation may seem like a statistical curiosity, or like the softest of soft issues—one that harms no one and offers at least psychic compensation in the midst of a financial wasteland. But it is a legitimate business problem, one that can create tangible problems for the present and the future. The corporate world is littered with real-life Firm Bs.