Poor Joe

10/22/2007

Poor Joe Torre.

George Steinbrenner's offer would allow most Americans to retire in comfort after a single year of work. Add the incentive payment for success and their children could retire too.

Torre was, he said, "insulted" Steinbrenner wanted to connect his pay to his performance. (He didn't, of course, phrase it quite that way.)

Not that I'm siding with Steinbrenner. I have a firm policy: When rich people negotiate, I don't choose sides. Joe, George, anyone else in this position: Don't tell me how unfair the other party was. Don't tell me about the other side's greed. Don't tell me you're insulted, hurt, generous, undemanding, or anything else.

Stop complaining in public -- it's undignified, serves no purpose, and annoys everyone. You negotiated and didn't get what you wanted. Grow up and shut up. Nobody cares.

While we're at it ... could we have less complaining about what players earn? They might not do anything important. They might look more like employees than executives or investors. They did, on the other hand, work very hard to reach the top of their craft, and negotiated well. Not my business either.

Ridiculing Accenture for choosing Tiger Woods as its non sequitorial celebrity symbol is, on the other hand, just fine.

Getting back to compensation, it's a dental subject for executives -- necessary, but not today, thanks. Compensation is to employee relations what service levels are to IT/Business relations. Just as the only uptime business users find truly satisfactory is Always, the only compensation employees will ever find truly satisfactory is More.

It's the American way.

This is as good as it gets: Compensation that is fair, easy to understand, consistent with your priorities, and not a performance disincentive. To achieve this, build it from four building blocks: The base (what you pay for showing up), promotions, variable compensation, and spot bonuses. Each has a different role to play:

Base: For each employee there's a theoretically perfect base. That's the magic number where the employee has no economic incentive to leave and you don't have an economic incentive to find a replacement.

Earth being a stochastic realm, the "perfect" theoretical wage is more of a blur than a point, but that's okay. Replace "no economic incentive" with "more inconvenient than it's worth" and you're close enough.

The base has nothing to do with performance or value, only the labor market. Adjust each position's range every year according to what the market dictates. Adjust each employee's position within that range, based on increased knowledge, ability and skills.

Promotions: When an employee demonstrates the ability to perform a more demanding job, someone else will pay them to do so. It's time for a promotion -- a different role, which means a different range, and a different position in the range. Fail to promote and you're no longer near the theoretically perfect base rate.

Variable compensation: This is the magic buzzword for the annual bonus. It's called "variable" compensation because it varies each year depending on how each individual employee performed that year.

Variable compensation is a good news/better news situation. The good news: You can make variable compensation enough to be meaningful -- something you can't do with wage adjustments.

When you recognize performance by giving an employee a raise, you might manage a 7% increase for a top performer. For a $75,000-a-year employee, that means $40 a week more cash than average workers get who receive the standard 3% inflationary increase. Big deal.

That's how it looks to the employee. This one raise will cost the company $25,000, (assuming the employee stays ten years and discounting the cash flows) whether or not the employee continues to be a top performer.

Instead of a raise, give your top performer the same 3% inflationary wage increase you give everyone else ... and a $20,000 bonus. Even after taxes that translates to something like $12,000 in cash. That's serious money to most employees (the good news), and it saves the company $5,000 (the better news).

Spot bonuses: If an employee goes above and beyond, it's an event, and it deserves recognition. Write a check, and do it right away. Reserve spot bonuses for exceptional contributions, not merely for successes. Otherwise they'll become entitlements -- ignored when they happen, resented when they don't.

Fair compensation isn't all that hard to do. In principle. The details -- figuring out the market range for each position, and where to place each employee in that range -- are where it's hard.

But of course, the details are always what's hard.

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