“Labor is prior to, and independent of, capital; in fact, capital is the fruit of labor, and could never have existed if labor had not first existed. Labor can exist without capital, but capital could never have existed without labor.” – Abraham Lincoln, by way of Heather Cox Richardson’s “Letters from an American.”
“Do you know how much Curt Cousins makes?!?!?!”
Expressing outrage over professional athlete compensation is a popular pastime. And yes, on the face of it the hundreds of millions they’re paid is absurd, unlike the completely reasonable tens of billions paid to team owners in exchange for broadcast rights to the games their teams play.
Personally, I don’t see the problem. Athletes are paid for their work. Team owners? Not so much.
The question team owners must answer when negotiating athlete salaries is much the same as the question management must answer when setting compensation, whether it’s for current staff or new hires: What would constitute a fair number?
I’m happy to help. Here’s a framework you can use, both to arrive at the right number and to communicate the logic of it. It has four components: (1) raises; (2) the annual bonus; (3) spot bonuses; and (4) promotions. One at a time:
Raises: A raise, in theory, adjusts the employee’s base compensation – their salary or hourly rate – to what a competitor would offer to hire them away, based, for the most part on the position in question. It’s where the law of supply and demand holds sway. The perfect raise makes each employee’s pay high enough that they have no incentive to leave and the company has no incentive to replace them.
The company’s payroll analysts should be able to provide a reasonable estimate for each job title, although it’s worth noting that they’re likely under some pressure to underestimate what the market would really have to offer.
Raises have nothing to do with an employee’s performance – an essential and often botched aspect of how compensation should work. That’s because a raise is an annuity – it pays employees in future years for their performance this year.
The annual bonus: Unlike raises, employee performance this year has everything to do with their annual bonus. There’s no algorithm for calculating it. Think of the annual bonus as the company’s way of saying thank you to the employee for going above and beyond what their base compensation would lead their manager to expect.
Among the reasons for using the annual bonus to recognize exceptional performance is that in round numbers it can be three times what the company could offer were it to recognize it in the form of a raise. That’s because the bonus is a one-time event where a raise is, as mentioned, paid year after year after year.
Spot bonuses: Where the annual bonus recognizes a year’s worth of strong performance, a spot bonus is a handy way for a manager to thank an employee for something exceptional they just did. It should be in proportion to the business value of what they did, and it should be big enough that the employee sees it as a big number.
Promotions: A raise increases an employee’s base compensation in line with how the labor marketplace has changed for the job they’re paid for. A promotion changes the job they’re paid for, which means their base compensation should change along with it.
It’s worth noting that promotions come in two forms. One recognizes an increase in skills that makes an employee more effective in the job they hold. You might, for example, promote a developer to senior developer – same responsibilities but better at them.
The other changes the job the employee does, for example, from developer to project manager.
This framework has the advantage of clarity, but it will require strong and consistent communication, because how it addresses skills and performance can be unsettling. Especially, decoupling raises from performance just isn’t how most employees think about what they should expect.
Bob’s last word: You might have noticed that nothing in this framework is expressed in terms of rewards and incentives. That’s deliberate. As Alfie Kohn pointed out in his classic “Punished by rewards,” (1993), managers who rely on compensation for motivation are trying to bribe them to perform. And, it sets up a reverse expectation: If the employee doesn’t get the raise they want the manager shouldn’t expect them to perform at their best.
Smart managers don’t think about compensation in terms of incentives and rewards. They think of it as the company’s loudest and most sincere voice when it comes to expressing its appreciation for a job well done.
Bob’s sales pitch: No, I haven’t changed my mind. I’m still planning to retire the end of the year. I’m still interested in your ideas for what KJR might discuss between now and then. Let me know, either through my Contact form, or in the Comments.
On CIO.com’s CIO Survival Guide: “6 ways CIOs sabotage their IT consultant’s success.” The point? It’s up to IT’s leaders to make it possible for the consultants they engage to succeed. If they weren’t serious about the project, why did they sign the contract?