How much value is added by the individual holding that important management post? Would those same output results occur no matter who was the incumbent? Should any person who holds a position of substantial impact be automatically highly compensated? How much of the “job worth” is truly attributable to the talents of the individual versus the normal outcomes anyone could generate from that place of power? If someone is placed in a spot whose leverage has been created by the larger organization and its systems, why do we assume they deserve so much more pay than if they were an individual contributor with limited ability to affect the bottom line? Is it the job or the person that creates value and how much comes from each?
These questions are integral to the compensation tradecraft yet are rarely discussed or even mentioned.
A recent article had an interesting take on the global compensation issues from bankers meeting in Switzerland. Most felt that their generous remuneration was a matter of disinterest to their institutional investor shareholders, because it was a relatively tiny expense compared to the profits. But a few noted that "it's the seat, not the individual," and found it offensive to see some callow young ignoramus earning millions merely because they had been placed at the head of a hedge fund which almost automatically generated billions in profits. That comment brought back memories of my compensation childhood when Robert A. Smith preached the distinctions of organizational leverage versus human capital factors (KSAs) back in the early 1970's to his four young corporate comp/org analysts named Dave Thomsen, Gerry Stern, Larry Cook and Jim Brennan.
He directed our reverse-engineering of virtually every job evaluation plan that existed at the time. Taking the most statistically reliable elements of each, we then freshly designed and validated a customized point-factor plan universal enough to suffice for the Fortune 50 multinational conglomerate we served. Besides the traditional personal features people bring to the job like education, experience and specific types of skills, we had an entirely distinct set of other categories we called “organizational factors.” The personal human capitalelements specific to the individual (KSAs) could be carried from job to job and proved to have significant but limited effect on market compensation. The realmoney came from the leverage supplied by the organization for the application of the individual performer’s talents.
A skilled surgeon or product designer would have great value up to a certain point. The personal value of an isolated worker would not continue to increase at the same rate (it showed an asymptotic relationship) as that of a less “skilled” but more “responsible” manager or executive given a higher degree of wider impact. A great individual contributor only has one brain, two hands and so many hours to ply their trade. The market value of personal KSAs flattened out fairly quickly. On the other hand, even an indifferent manager, director or other executive operates as a conductor, coordinator or force multiplier who stirs those diverse KSAs together and applies them throughout the broader enterprise than the individual work unit. The bureaucrat who applies the creative talents of otherwise isolated Nobel Prize winners will earn his or her value from that application leverage position rather than from their personal stand-alone talents. Albert Einstein and Stephen Hawking would have had very limited values as ditch diggers but had tremendous values as teachers and publishers and innovators in the field of theoretical physics. Many a brilliant genius has starved to death in this world due to failure to find an adequate platform from which their talents could be monetized.
There are things only the person can do. And there are things only the organization can empower the position to do.
This might be fundamental Compensation 301 to some readers, well known and fully documented in every textbook, but I don’t recall seeing it discussed much, if at all. Please offer links or references that prove me wrong. Supply even better elaboration on the topic. I’d rather be wrong than right, on this point, because it is pivotal to a sophisticated comprehension of compensation tradecraft.
Whether the concept is new or old, just think about it. It might help clarify some compensation valuation questions you face on a daily basis.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries. After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.