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What Are You Worth?

May 18, 2007 Michael Wurzer

I have the privilege of running a company with 36 employees. With that privilege, I also have the responsibility (at least indirectly) of determining how much each of these fine people are paid. For anyone who hasn’t had this glorious task, let me be clear: it sucks.

First, though the competitive market for the job in question should make determining compensation easier, the reality is that there is no “market” rate for the person sitting in front of you. Everyone brings a unique set of skills and experience to the table that makes it nearly impossible to use general job category statistics. The closest you ever get to a “market rate” for any particular person is when they have an offer from another company, and that’s usually too late.

Second, things that really matter to the employee (their financial needs and wants) don’t matter to the employer. What matters to the employer is the contribution of the person. Don’t get me wrong, employees care deeply about their contribution, but the point is that the employee also has personal interests that make negotiations over compensation less than enjoyable or effective.

Third, at least in our business of software development and support, measuring contribution is nearly impossible and almost certainly futile. Lines of code, numbers of bugs, numbers of calls resolved, time of call resolution, etc., are flawed concepts. In fact, all measurements will produce what I call the bubble-wrap effect — if you push down in one spot a problem will simply pop up in a different spot. Moreover, there are plausible arguments that incentive based compensation plans actually thwart creativity. Basically, creative people get annoyed by any attempt to “lure” them into doing a better job with one carrot or another. These attempts at “management” have made Scott Adams rich.

With market forces, personal negotiation, and measurement all relatively ineffective, the end result is a gut level decision. Isn’t that great? Compensation becomes a nearly arbitrary decision specifically checked only by the employee looking elsewhere for a job. Fundamentally despising that part of my job, I studied compensation theories for the better part of three years, trying to figure out something that was fair, transparent, easy, and effective.

First, I read through books like The Great Game of Business by Jack Stack, Bringing Out the Best in People by Aubrey Daniels, and Managing Through Incentives, all of which are excellent books advocating some sort of measurement and incentive compensation system. We even tried some of the ideas for awhile, unsuccessfully. I next stumbled on this post from Joel Spolsky, which led me to the books linked above describing how incentive compensation plans are destined to fail in software companies. Having been floundering around with such plans, Joel’s analysis really made sense.

Yet, that simply left me stuck. Compensation needs to retain the employee and needs to be related to their contribution (i.e., fair). I partly solved the “retention” issue by targeting our salaries and other benefits slightly higher than what I saw as the “market” rate for each position. This worked for awhile but, over time, things can easily get out of whack as the overall market matures or shifts relative to the maturity of your own team.

To combat this and also to try to address the fairness issue, we turned FBS into an employee-owned company. What this means is that each employee of FBS who is here more than six months gets awarded FBS stock as part of their compensation package, and 100% of FBS is owned by the employee stock ownership plan (ESOP). The value of FBS’s stock is determined on an annual basis by an independent valuation firm. So, even though FBS is privately owned, we have a stock price and that stock price or valuation is a reflection of the contribution each of us makes to the company as a whole.

In other words, the stock price and share awards are our performance measurement and incentive compensation all in one. I think this plan works because the success measurement is at a high enough level that there is little risk of creating unintended consequences, and because the small size of our company gives each person an opportunity to see how their individual contributions impact the whole. Actually, we’re working on this last part right now, trying to integrate our strategic planning around the financial metrics and working them down into all levels of the organization to give everyone a better idea of how they can help improve the stock price. So, we’re still walking the tight-rope to a degree, but I feel like we have a good framework that meets the goals of transparency, ease, fairness, and effectiveness. Our stock value went up 160% last year, so something must be working.