Thought experiment: if you were running a company of your own, starting from scratch, what principles would you adopt with respect to the employee compensation system? Here are mine:
* Simplicity. The compensation system must be easy to understand and implement, thus avoiding employee confusion and lengthy, error-prone decision-making processes.
* Fairness. Each employee should be compensated fairly and justly relative to all other employees and relative to the market as a whole.
* Meritocracy. Each employee should be compensated in proportion to their net contribution towards the key success drivers of the business. “Net” includes both direct individual contributions and collaborations with others, with a weighting appropriate to the business and nature of work.
* Transparency. Compensation outcomes such as salaries, promotions, and so on should be fully transparent. Doing so encourages fair, meritocratic compensation decisions by forcing the outcomes into public view.
* Egalitarianism. The pay differential between the lowest-paid employee and the highest-paid employee should correspond directly to their expected relative contribution to company success. For instance, if the highest-paid employee is expected to contribute roughly 10x more value to the company than the lowest-paid employee, their total compensation package should be roughly 10x that of the lowest-paid employee’s package.
* Democracy. Every employee is responsible for influencing the coaching, future job responsibilities, and compensation of other employees they work with by providing performance feedback on a continuous stream basis, and merit assessments periodically. The performance feedback drives coaching and job responsibilities. The merit assessments, summed up, define compensation increments. Management is an equally weighted participant in this process… “one man one vote”.
* Transparency is a key check and balance that ensures the other principles are enacted. Without this, it is much easier to game any system, and much harder to generate mutual trust.
* As a basic premise I want to encourage collaboration and push as much autonomy and control as possible to individual employees throughout the organization. Hence the democratic principle.
* Yes I really am saying that employees should decide how much incremental compensation coworkers get based on a democratic process. I believe a decision market may be an appropriate mechanism for implementing this principle (see definition or read Wisdom of Crowds). I can see risks in it. I’d like to try this experiment in any case, and hear about any others who have tried it.
* Yes I really am saying that employees should have a say on future job responsibilities of their coworkers. This is especially true for people in leadership positions; they should essentially be voted in and out of office on a regular basis. One risk here is that a leader loses their job because they have to make an unpopular decision. This is an education issue… smart people should acknowledge that unpopular decisions are sometimes part of a leader’s responsibilities, and competent leaders can convince others that a correct yet unpopular decision is the right thing to do.
* Egalitarianism runs against the trend of extreme differential pay commonly found in stock-driven companies, where executives may earn hundreds of times what lower-paid employees do. It is a natural corollary to the principle of fairness. Depending on the mechanisms used to implement the compensation system, egalitarianism may be an emergent property rather than something you have to enforce through artificial constraints.
* The meritocracy principle doesn’t prescribe whether rewards should be weighted more towards group results or individual employee results. The appropriate weighting is a business-specific decision. Both attributes should have some weight, though… otherwise you get the “lone hero” syndrome at one end of the spectrum, or pure communism at the other.
* Performance feedback and coaching should be ongoing (realtime), driven by the stream of 360-degree input from customers and coworkers. This process is distinct from merit / compensation assessment, but it’s a vital input in that it forces people to make their thoughts on performance explicit. Once that is done, coaching becomes easy, and forming an opinion of merit and compensation becomes easy.
* For very small companies, the simplicity principle trumps everything else. That’s why partnerships make so much sense… just split compensation according to some fixed rules until there are enough employees to justify a more compex system.