Thought #11: Rethinking Compensation


Yesterday I read an article about Paid, Paid Vacation. A couple weeks ago I read an article about the compensation structure at Valve. Both of these articles got me thinking about new ways to pay employees, and the best ways to structure management and pay. Today I’ll tackle pay, and tomorrow I’ll tackle management.

There seem to be two dominant pay structures: fixed and variable. A fixed structure is where the employee is guaranteed to earn a certain amount of money over a set period of time, while a variable structure typically bases pay off of some performance measurement (think commission based pay). In practice, a lot of people are paid on a combination of the two, i.e. a fixed base salary with a variable bonus.

Ideally you would pay someone a percentage of the sum total of their contributions. I say this is ideal, because it would allow you to fairly compensate better workers for being better, while still allowing the firm to accrue profit. It would also avoid the issue where someone is paid a fixed salary that is more than the value they added. Commissions do this, but applying commissions to non sales jobs becomes tricky. Bonuses attempt to do this, but bonus ranges are often close-ended, and determined through a murky process run by higher ups.

At the end of the day, salaries are a way to reward employees for past and current work, and to incent future work.

What if, before starting all projects, employees had to submit an estimate of how much value the project would add, and how much of the project they were responsible for. Once approved, the employee would receive compensation based on that estimate and the percent they contributed (or average estimate if multiple were working on a project) during the length of the project, with a bonus (scaled to the estimate and the percent of work completed) upon completion of the project. This would still allow people to work on and get paid for good ideas that failed, but would reward people for completing projects. It would also allow people to choose between working on a large number of small projects that add little value, or one large project that adds a lot of value. It would also force employees to think about the work that they are about to do, and to quantify the value it adds. The downsides are that it would require an infrastructure to approve the value estimates, and that employee’s income flows would be variable. There would also be some work needed to standardize the value added from intangible things like brand and public perception. However I think that all of those obstacles could be overcome, and that this could incent the best out of your employees.

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