To Neither Shareholders nor Talent do the Spoils Go

John Sumser brings up an interesting point about most corporate compensation programs: "Compensation systems are really all about managing conflict within an organization." He is exactly correct. Which begs the question: conflict between which parties?

It's no secret that corporate compensation systems are designed to ensure that people don't fight at work. The reasoning is pretty simple: if two people with the same title make different amounts of money then the person who makes less will be upset. Since few organizations have any rigorous and meaningful way to determine the contribution of an individual employee, we default to "market surveys" and "title leveling" to settle the issue.

Modern compensation theory is based on an assumption that is so prevalent that it is rarely questioned: two people with the same title must be delivering the same amount of value to the company. Once stated as such it becomes clear to anybody who has spent any amount of time inside of corporations that the assumption is patently false. It is also becoming increasingly problematic for people that might potentially benefit from the situation:

People are also quite negative about their current “employment deal” — the implicit contract between company and individual — particularly in terms of the nature and fairness of the rewards available to them for their contributions to improving profitability.

Whether it is clearly stated or not, most employees believe that if they are going to give up their constitutional and inherent rights (assembly and free speech being just two examples) that they are going to get something in the bargain. Companies respond to this inherent "employment deal" by layering on benefit programs and spifs, when most employees are really asking for a clearly stated program of how value is recognized and rewarded that they can agree to before they sign up. The unfortunate truth is that even with the advent of stock options and profit sharing plans, there is a gnawing feeling amongst employees that you don't really get paid for contribution at all, but for factors that are not relevant to the competitive advantage (internal political skills, for instance).

In the developed nations, employees’ skepticism about rewards tends to manifest itself as increased cynicism, especially regarding pay for performance. Generally, respondents don’t perceive that their own rewards have improved along with their company’s (and the economy’s) improving fortunes. As a result, they view pay for performance as a laudable philosophy that’s not effectively implemented across the workforce broadly.

While the objective of most comp systems is to keep employees focused on other things, the reality of the situation is that people want to be rewarded for the value they contribute. But under guise of being "fair" most compensation systems are really trying to manage a conflict between capital and talent, and it is this underlying tension that is driving the general dissatisfaction with most compensation systems. When all is said and done, people realize that if you really paid them based on the value they produced then talent would get a greater share of profits than shareholders. Paying people based on their role or title is a way of being able to tell people who give you money that they will be able to get theirs first.

Max Goldman over at the Success Factors blog has an interesting article which starts to get at the heart of this. Max speaks of a real-life scenario where two employees have identical job titles and compensation, but one is the creative genius. Max says: ” The idea of classifying employees by their fundamental contribution to the success of a business instead of by their role or band level or job title, etc. is an interesting one." Max's article is very good, if not a little maddening: of course the person who creates the recipes should be paid more than the person who follows the recipe. The creator is usually more valuable than the repeator, which is why I believe the US has to focus on creative enterprises and leave analysis and replication to places whose infrastructure and culture are more aligned to those capabilities.

People should be compensated for the value they deliver - period. Even the concept of grading and title leveling are ineffective and counter-intuitive. We are saying that if you take two people with completely different brains, different markets and different approaches but call them by the same title that they de facto provide the same amount of value. It's not possible and, worse, it's destructive. It's a way for companies to cover their basic incompetence in measuring how individuals can create value for the organization.

There are five basics for compensation that is fair, focused and maximizes value for both the talent and the shareholder:

• First, people should align with organizations that are clear in their purpose.  This reduces transaction overhead in functional tasks which detract from value-adding activities.
• Second, the organization should be thoughtful enough in its planning that it should have a good idea about what job needs to be done and what value that job would have to the overall success of the enterprise.
• Third, a prospective talent should be able to prove through the portfolio of their previous work and quality of their associations that they can execute that task in the manner and timeline specified by the company.
• Fourth, an individual should be given an opportunity to create an internal market for their work that measures the contribution of their work by virtue of what people are willing to pay for it.
• Fifth, talent should be compensated for its contribution, not for its role.

In our desire to ensure people who give companies money that they will get unduly rewarded for their contribution (as we have said, as more money chases fewer deals, talent is more valuable than capital) we are in fact telling people that their contribution is not what is important.

I have spoken before of the terrible homogenizing effect of most corporate practices. When people are rewarded for work that benefits them and their position the shareholders get the short end of the stick. But shareholders are apparently willing to deal with that as long as they get first dibs on whatever is left over. In short, most corporate compensation systems are antithetical to basic capitalist principles (value for value exchange). It is this way that most modern compensation systems reduce individual incentives and in that way hurt both the employee and the shareholder.

When talent is more valuable than capital then the people who invest their time and creative capacity will be rewarded before people who invest their money. With the shift to products that prize human creativity more than plant and equipment utilization, and with more money chasing more deals, this time is coming.