Editor's Note: A Classic discussion on the tipping point (if there is one!) for compensation, via Dan Walter!
Many of us spent time a few years back 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 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. 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.
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