Compensation Systems

post # 493 — January 25, 2008 — a Managing, Strategy post

I’m thinking of writing a monograph or a book on compensation systems. As part of it, I began a list of some of the things a compensation system needs to accomplish. It’s a long potential list of objectives — too long, since no one system can accomplish all too many objectives – and many of them are contradictory!!

Criteria for a good compensation system:

1. It encourages individual initiative
2. It encourages working for the good of the whole
3. It helps people improve, not just rewards them when they do
4. The decision process is seen as based on all the real facts (i.e. thorough)
5. Inputs to the process are received from multiple constituencies (group and project leaders, clients, subordinates, peers.)
6. The decision process is perceived as fair
7. The criteria for differential rewards are well understood at the beginning of the year
8. At the end of the process, people know why they got what they got
9. At the end of the process, people know what to do (and how to do it) next year to get higher rewards
10. It encourages people to work for the long-term, not just latest year
11. It provides an incentive (encourages people) to stay
12. It can reward a variety of contributions necessary for the health of the firm
13. There is an appropriate return to those who built the business
14. There’s a chance, over time, to achieve the highest levels (i.e. no permanent second-class)
15. It does not lock-in high rewards for past contributions that are not sustained
16. The system discourages “cruising” (those on a high reward no longer being energetic)
17. Timing of rewards does not put firm’s cash position at risk
18. The system does not allow or encourage “gaming” (such as hoarding credit)
19. Individual superstars can obtain a premium reward

Which of these items do you think are most critical? Least? What have I left out?