Editor's Note: In this wonderful Classic, Dan Walter reveals how great compensation plans share characteristics with the analog clock, one of the oldest and most amazing of human inventions. Intrigued? Read on!
How much are your compensation programs like an analog clock? Analog clocks are some of the most perfect devices ever created. They provide a sense of order and clarity to the world through the use of only two or three lines. This simplicity allows them to be understood by people regardless of language. They can be understood by young and old. They provide an exact or relative reference for wide-ranging and global needs. They have stood the test of time (no pun intended) and will continue to do so.
But, the simplicity of these amazing devices belies their underlying complexity. Underneath the simple face and minimalist lines that keep order of our lives is a quiet and durable set of gears, a power source and something that is tuned to a fine degree of accuracy. Hundreds of years ago clockmakers were some of the most skilled and respected craftsmen of their communities. Clocks were expensive and many relied on a centralized tower that was the only timekeeper for miles. As technology improved and became smaller and cheaper nearly everyone could actually wear one of these amazing devices on their wrist.
Every great compensation plan is simple on its face. Teaching someone to understand these programs requires little effort on the trainer’s part and little knowledge on the user’s part. The components that are visible are limited: instrument used, currency, timing and reason for payment. The program can be applied across many disciplines and uses and adapt and evolve as needs require. The trick is what is underneath the surface.
Too often “simple” compensation programs means simple for the practitioner as well as the user. We must realize we are the master craftsmen of our industry. We must understand that removing a difficult gear in our program will also result in reduced accuracy or preciseness. Depending on the need of our plans this limited accuracy may be fine (in fact, it quite often is). We must also be aware of which gears must be close to perfect to ensure ongoing usefulness. Knowing our craft and the impact of each and every piece of compensation is the difference between programs that work and those that don’t.
I think this is often where we fail. We remove the wrong gear through a lack of understanding consequences, proper systems, or confidence in our expertise. When challenged by someone outside our craft (think CEO or BOD member) we sometimes remove or change components to make them happy. When planning for the management of our plans we often use tools poorly suited to the task. We must be confident in both our own knowledge and in the tools we use.
When we put this all together, we must understand which elements must be displayed on the face of our clock. Does your program need to be a simple alarm clock or a precise diving chronograph? Too simple and you are dependent on relative results. (Is “a quarter to nine” accurate enough for your needs?) Too specific and you may distract from the purpose of the plan. (Are your requirements specific enough to need to know barometric pressure or thousands of a second?) In the end, every element must be understood, or should probably be removed. For this metaphor to work the compensation plan and compensation professional must work together as the inner-workings of the “clock”. While the surface must remain as clear as that of a watch, remember that simple does not necessarily mean simple for those planning, building and managing every piece of the program.
P.S. A bit of trivia for you. When you see advertising photos of analog clocks the time is usually set to 10:10. This is because it makes the clock face look “happy.”
Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture and is considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation than Dan refers to as informative written Ambien. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.