Compensation Insights from Causal Economics
Causal Economics provides a great deal of insight on compensation practices. It reinforces some well recognized practices, flags some areas of poor approaches and lays out potential new approaches. This post puts a few areas on the table for discussion.
Good compensation systems always try to connect pay (the cost to the employer and the benefit to the employee) to results (the benefit to the employer). An employee then manages his/her effort (their cost) to achieve target pay. Employees try to hit their benefit pay with the least amount of effort possible maximizing their B/C change ratio. Employers try to get the most results for the least amount of required pay, also maximizing their B/C change ratio. Through market negotiation they strike a balance.
Sales commission is the purest example of effectively coupling C and B for company and individual.
The next best example of coupling in practice in compensation is the bonus structure. Bonuses are tied to results, and so follow the idea with commission. Management bonuses are usually heavilly dependent on individual and broader team-based contributions.
Beyond these, most compensation is for effort exerted (time worked etc.), which often reflects base salary demands (to reduce employee risk). But, flat pay for time worked with no variable compensation often results from a stated difficulty in measuring an individual’s impact on results. This is where many experts are wrong. Every situation in business is one where individual and team impacts intermingle. Individuals must manage what they can and influence where they need to. No one’s individual impact is a lone endeavor, especially in today’s fast moving and free flowing economy.
Imagine if sales people didn’t have to worry about closing deals because customer decisions are out of the sales executive’s control. That’s reality and they get over it. Do employees take the brunt on pay sometimes when things out of their control go the wrong way? Yes. Do they sometimes get to ride the coattails of the hard work of others? Yes. This is business and reality and Causal Economics reminds us that anyone who spends time debating poor measurability of individual results as an insurmountable barrier is out of touch.
Causal economics suggests that all compensation should be a combination of some base plus a variable compensation component for individual performance plus a variable component for broader results (team, company etc.). This structure pragmatically couples B and C for employers and employees.
Management meetings in general need an overal