You are both an executive and investor in your enterprise. Compensating yourself at a rate other than market–pay based on the role you hold, the skills you have and the marketplace you're in–sets up several breakdowns, both for you and for the business.
Design the Enterprise as an Investor
How you think about your compensation affects how you think about the compensation of others. Reflect on your actions to reveal your philosophy. Given that compensation has a significant impact on the organization, know and be consistent with a philosophy and practices for designing compensation. My philosophy: pay base salaries slightly above market median and provide strong rewards for performance above standard, at both the individual and team levels; share company successes broadly in some manner. When we win, we win together. Establish and build a culture that provides satisfaction beyond the financial domain.
When you aren't rigorous in making assessments of the market value of your expertise for your present situation, it's unlikely you will be rigorous in making these assessments of others. Overpaying is a negative for investors, as excess returns to management come at the cost of returns to investors. Excess compensation produces a culture of entitlement and resentment. Underpaying also produces resentment, at least from top performers, and increases the likelihood of a culture of incompetence, dissatisfaction and higher turnover. In a competitive marketplace we compete for employees just as we compete for customers. A driver of Apple's success is their commitment to positioning "A" players only for to key roles and teams.
An Approach to Designing Management Compensation
- Constitute your philosophy for compensation. You can get help from other CEOs, your board, and your network of professional help. Do not hire compensation consultants–the incentives are misaligned.
- Develop a standard practice to determine the base salary range for each role in your market and for the size of your company. Possible resources include your CPA, industry and geographic compensation surveys, and professional investors in your space. This practice is then performed periodically to keep your knowledge of compensation aligned with market changes.
- Rigorously specify what results are specific to each role. What are the outcomes that each individual or team produces? Specify the standards for acceptable performance. Reward performance exceeding satisfaction. A starting place is the individual/team gets 10% to 20% of the results produced beyond standard.
- If you have a board or investor as a customer for your performance, establish your own compensation to be base plus performance bonus as well. If you are your own customer, have only a base salary for yourself, closer to the top of the range.
- Constitute a minimum profit standard for the enterprise. Share profits achieved above this standard. 10% of excess profits is a starting point.
- Design all performance rewards and profit sharing to have a 3 year time horizon. Rewarding annually provides incentives to "game" the system.
- Adjust base salaries up or down as the market changes. Success with this practice requires it be part of your culture and you make your team aware of the philosophy when they join and ongoingly. The fact is no single company can stand against the marketplace. To be effective, strategic and competitive we must always be responding to market forces, adjusting our design as these forces change.
Different companies have fundamentally different cultures. In some situations everyone employed may be a real team member (this is often the case in very small enterprises and professional service firms. In others, there are builders and mercenaries. I prefer (where possible) to work to have an enterprise where everyone is committed to our competing successfully to fulfill our mission. However, I have learned to be rigorous in making these interpretations. If you have mercenaries or laborers, design their compensation appropriate to their roles.
If you pick the right people, give them the opportunity to spread their wings and put compensation as a carrier behind it, you almost don't have to manage them. Jack Welch
There's more to culture than compensation, and we must always do our best to have compensation fit our environment and mission. One of the 10 fundamentals of economics is that people respond to incentives. Though fraught with a myriad of negative consequences when badly designed, compensation is a very powerful incentive.
How Much Should you Pay Yourself? Entrepreneur April 18. 2012
Relevant Prior Posts
Image credit: iStockphoto/tattywelshie