How Much More is Enough?

Many of us spent time during the last week watching the news about a man in Southern California who was wanted on suspicion of murder, including the killing of at least one police officer. Horrified and fascinated, those of us in, or near, Los Angeles were aware of what this man looked liked. And most of us wouldn’t have hesitated to contact the police if we had even glimpsed this guy’s shadow. So, what does this have to do with compensation?

First, it was announced that a $1,000,000 reward was being offered for information that would lead to his capture. You read that right, one million dollars. As compensation goes, this is not chump change. A day or two later, while I watched the evening news with non-compensation professional friends, it was announced that an additional $100,000 had been added to the reward. One of my friends said, “Why would an extra $100,000 convince someone to call when the first million didn’t?”

As the compensation guy in the room, I tried to figure out a way to explain this from a compensation / behavioral economics / carrot-stick or any other perspective. As it turns out, I had nothing except. “That’s crazy!”  These were truly insightful words coming from someone who figures out effective pay as a profession.

Later, as I worked on metrics and goals for a long-term incentive plan, this brief conversation came back to me. I had to ask myself, “How much more is enough?” If you have determined that n dollars should be enough to get someone to do what you need, but the need was not filled, is offering n+10% really going to make a difference? And, how would you know?

This is one of the most important issues in variable compensation. In the age of Say on Pay it is even more of a factor in executive compensation. At what point do more dollars simply ensure that someone keeps working, without having making a material change their behavior? Before we decide that more money is the right answers, we need to ask more “why” questions. We have to be better than simply citing survey data as our reasoning.

When carpenters are asked to solve a problem, their first solution has something to do with wood. When a hairstylist is asked how to make someone look better, they usually start with hair. When a compensation professional is given an issue, we often start with money (or its direct equivalent). The next time the opportunity to offer a solution arises make sure you have considered as many “non-money” solutions as possible before you say “add another $100,000”. Trust me, your judgment will be lauded and your solutions may be far more effective.

Tell me about a time you added more money, but got nothing new in return. Or, share a time where you decided against more money and got better buy-in than might have seemed possible.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

Comments

[Ann Bares]

Great post and point, Dan. It reminds me of one of my favorite Paul Hebert quotes, which I find myself using frequently: Incentives are your worst first solution!

[E. James (Jim) Brennan]

Perhaps the extra added sum was simply a communications element, designed primarily to impact public perception. The additional amount was insignificant in absolute terms but it provided some contributor with publicity and gave the media an excuse to bring up the original award and the objective again. All compensation is communications, expecially when offering tiny incremental amounts. After all, long after the milllion dollar publicity had waned, the extra bit re-energized the incentive package message.

[Jacque Vilet]

Great post Dan.

What if we really designed incentives around what each employee's motivating factors were? Cash? Paying college tuition for one year for the employee's child. Allowing a leave so that a person could devote time to a favorite social cause?

All it would take is one company bucking the norm--- maybe Google? Remember what they did last for merit increases?

[John A Bushfield]

My hunch is the extra hundred grand had more to do with the contributor than the money. Regardless, your point is well taken. The same reasoning, of course, can be applied to executive pay in general: How much is enough? What's the threshold beyond which it becomes 'stupid money'? And, I guess the answer is "it depends . . . "

[Joe Rice]

Thought provoking post Dan!

As far as relating stories, I came on to my current company in the midst of a special incentive roll-out, where they wanted to move the needle on some metrics that had not previously been a focus. A special incentive was designed along with a fairly large communication an education push.

It was successful. But the question within the team was why? Was it the pay or was it the focus? I think the latter to a large degree. It's my view that if employees are asked to contribute to an important company goal, they will want to please their bosses and provide contribution to their company.

I hope to have the opportunity--in the spirit of Ann's recent post on experimentation--to test the success of a similar initiative without financial component and see how well it goes.

[Dan Walter]

Thanks for the comments.

Ann: I love Paul's quote and will use it myself in the future.

Jim: You may be right that the extra money was a communications element, but it wasn't well executed if this was the case. The Million dollar reward was still being reported when the extra came on top of it. Once again, communication (and the execution of it) is so important.

Jacque: Designing around every persons motivation would be hard, but not impossible. More companies should move this direction with the reality that even getting half way there may fix many issues. The real issue is that companies bucking the norm usually have a large, talented compensation staff and lots of money. When I have seen big innovative changes, that have come with big price tags. I think we all need to be more evolutionary, rather the revolutionary.

John: Good point on the reward being more about the contributor rather than the effort. Ego and status are big motivators for some people/groups. I have seen a study showing that there is a breaking point in executive equity compensation. Too little and decisions makers have no reason to take the risks required for growth. Too much and the value becomes too high for people to risk losing it.

[Dan Walter]

Joe:
Thanks for sharing the story. I love that people asked about the cause and effect of the effort. Too often we claim that our compensation efforts worked simply because the business did not fail. I see people arguing about the efficacy of their STI and LTI programs when the goals that ended creating success had nothing to do with those included in the plan.

I am writing another post likening compensation to a cars propulsion system. It takes far more energy for a car to get from 0-65 in a few seconds than it does to keep the car going 65 once it is moving. The Accelerator in this case is your design and roll-out communication. The ongoing propulsion is the metrics, goals, compensation and ongoing messaging. It takes a lot to get a programs kicked off correctly, but, like a car on the highway, it will die quickly without constant power. )wow, that's most of the most..... :) )

[E. James (Jim) Brennan]

Can't wait to see that post, Dan. I've plotted executive incentive plan design parameters with a sine curve (roller coaster) pattern peaking close to the positive ROI x-axis point. Incentives are situational. When the car is going downhill, you let up on the gas; when navigating tight curves, you slow down, etc.

[Chris Dobyns]

Just getting a minute to read this today, but thought it was great also. So, maybe the solution is a customized total rewards for each person (how could that be anything except optimal)? So yes, the guys at Google are an innovative and trend-setting bunch of folks. However, two years ago when I asked my counterpart at Google the reason why they selected 10 percent as the amount for the "across-the-board" increase for their entire workforce - he couldn't cite the basis or reason for why 10 percent was "right". We think it probably has to do with the research into that stuff about Just Noticeable Differences and human factors sensory/perception - but I'll bet there's a complementary psychological factor in play there also.

[Dan Walter]

Thanks so much Chris,

I find your Google example to be spot on. Even with all of the data Google has, there is still are tenuous specific links between their compensation data and employee thoughts, feeling and actions.

Maybe we need an eHarmony approach to compensation. A tool that looks at everything about a person then determines the most likely "best" compensation levels, mix and tools.

I am sure I can put it together in my spare time! Anyone want to help? I figure we can delivers it in about ten years....

[Rob McGoldrick]

After writing what looked like a short book as a comment I decided against it! In short, we have a group travel incentive company and have been very successful in running client programs where the "go against more money". We can typically save our clients money by finding locations for their program that generate a ton of interest with their participants. A client might come to us with a budget of $3500 per participant but we can fulfill all the needs of the program for $3300, so basically we saved them 5.7% on their program, it's super successful and the participants are looking forward to the next trip (and the participants don't even realize you spent less than if you gave them cash). It all depends on your audience and how you promote the program. Also, make sure your incentive offering is memorable and makes your participant look forward to the next program...

[Dan Walter]

Rob,

I think you make a good point in the amount of savings you indicate as reasonable. I think a savings of 5.7% can be substantial. I also think that unless the savings at the Exec Comp level is at leas double-digits, no one seems to pay attention. Flawed reasoning, but fact.