Tuesday, October 30, 2007

Comp logic

10/29/2007

If it makes you feel better, compensation has improved.

I'm not talking about the amount. I'm talking about how it's administered.

Not that long ago, many companies gave men raises when they got married. Women's careers stalled under the same circumstances.

The logic was impeccable: Married men needed more money to support their households. Married women, on the other hand, no longer needed as much. After all, they had husbands to support them.

The world does sometimes get better. Achieving perfection is another matter. If you expect it, you're sure to be disappointed, especially where compensation is concerned.

This, and other thoughts, occurred to me as I read my correspondence from last week's column on fair compensation (Poor Joe Keep the Joint Running 10/22/2007). What other thoughts? Glad you asked.

Why not base pay on value? Most employees think their pay is and should be based on the value they contribute.

It's a reasonable thought. That value is why companies employ people in the first place (for more, see The 70% solution IS Survival Guide InfoWorld 3/4/1996).

Here's the problem: Whenever a company bases compensation on anything other than what the market will bear, it faces one of two situations. Either it can get the same value for less by replacing its employees with less expensive alternatives, or its employees will leave for better paying employers.

Basing pay on value is inherently unstable.

There's another problem with value-based pay: Measuring the value. When you're dealing with the sales force it's easy. They sell. What they sell has a known margin. Do the math. No problem.

For just about anyone else, the connection between their work and the value they deliver can't be turned into a number that will make much sense. The value is there. Measuring it unambiguously isn't a problem any of us are likely to solve any time soon.

Can you really give a $75,000 employee a $20,000 annual bonus? No, you probably can't. The problem is that every year you employ this computation, you're assuming the employee will stay another ten years. Some employees will; many won't. If that sort of longevity is typical in your company, annual bonuses this large might not be a bad idea. If it isn't, don't fret.

First of all, unless your company is a truly awful place to work, the average employee turnover in IT is unlikely to exceed 20%, which means the average duration of employment is at least five years. That still allows more than $10,000, which isn't bad at all.

There's another alternative, too, at least in publicly held or soon-to-be publicly held companies: stock options, vested over ten years. It's true that the accounting for stock options has become controversial. The basic idea remains sound. Vesting options over ten years eliminates the risk of basing compensation on the assumption of ten years while getting much less, and in addition creates a financial incentive for employees to stay with the company.

In fact, you can give a smaller option grant and vest it over five years, especially if your company has a reasonable track record of stock price increases, because it's the employee's expectation of value that matters most.

Not a bad set of outcomes.

Pay for performance? Great. One question: How do you measure performance? This is the magic question, whether you recognize performance with variable compensation or prefer to use simple raises.

As a manager you have to have a way to assess ... not measure, assess ... how well employees are doing their jobs. The distinction between measurement and assessment is vital.

When you measure -- when you establish clear, objective criteria regarding how well each employee accomplished the goals, objectives and responsibilities you've established -- you face a hazard: You get what you measure. That means anything you mis-measure employees will get wrong, when you measure the wrong things you'll get the wrong results, and anything you don't measure you won't get. Especially, what you don't measure you won't get.

Think of what you ask employees to do, all the time, in addition to their formal responsibilities: Participate in ad hoc committees; take the initiative when something needs doing that you don't know about; and help each other out when one gets stuck and another knows the solution; to name just three typical examples.

If you assess employee performance, these will count in their favor. If, instead, you measure it, when you ask you'll get a predictable, and entirely deserved response:

"Why would I want to do that?"

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Copyright and other stuff -- The great KJR link point

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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Copyright and other stuff -- The great KJR link point

Thursday, October 25, 2007

theVent ajc2007Oct24

As you get closer to retirement and realize all the great possibilities, then these small health problems start to pop up. It's like a race for your ship to come in before the dock rots.

[I represent that remark, the pup says, coughing and wheezing while his nose runs.]

Monday, October 22, 2007

Jacques Brel is alive and well and bitching and whining in ATL via Paris

Why couldn't the Alliance/Hertz have done the whole show in French? It would have been unoffensive -- well mostly so. The bit with the red flag was crap without words.

Or drop the words entirely -- perhaps use oohs aahs and falalas.

Oh yes! I wonder what Peter Schickele would have thought of the higher female voice. Pretty voice but you couldn't hear her if another voice was present, esp the lower female voice. Somewhat like his concerto for lute and bagpipe. Or was that P D Q Bach's?

Of course this was all fine because the uncomfortable chairs covered with thin cushions made one forget the pain in one's brain.

Who says all terrorists are turban-headed camel-jockeys? Certainly we can add a bad slice of the French to this, starting w/JB.

Wednesday, October 17, 2007

what part of NO don't you understand, the N or the O

[name of guilty party suppressed] wrote on 10/17/2007 4:45:04 PM

For those of you who haven't heard [fellow employee]'s father passed away last week. Even though he has requested that we don't send cards [bold added by editor] I think it would be nice to let him know that he is in our thoughts and prayers. I have a sympathy card at my desk if you would like to sign it.

Thank you,
[name of guilty party suppressed]
Administrative Assistant Sr.

Tuesday, October 16, 2007

Project auctioneering

10/15/2007

The free market is a versatile tool for allocating resources.

So versatile that many consider it a panacea that solves all problems -- not only in the public marketplace but also in business governance.

Transfer pricing (the practice formerly known as "charge-backs") is just one example. Having an "invisible hand" make the complicated decisions required for properly allocating internally delivered services is tempting -- much easier than making them through careful analysis and consensus building.

Sadly, free markets have their limitations ("externalities" in EconSpeak) -- among them delayed-feedback-induced chaos, the "Tragedy of the Commons" (see Laissez-faire Internetism IS Survival Guide, InfoWorld, 3/25/2006 for descriptions of both), monopolies and cartels, network effects, and the Jeffersonian notion of usufruct.

My friend Carlton Vogt pointed me to another -- an economic conundrum called the dollar auction. Here's how it works, as described by Professor Oliver R. Goodenough (Professor Goodenough's article is about public policy -- you've been warned):

I'm going to auction off a dollar bill. Every subscriber to this column can bid. The only difference between this auction and eBay is that the runner-up also pays.

So if someone else wins with a $0.50 cent bid and you were the runner up with a $0.45 bid, you'd send me 45 cents, the winner would send me 50 cents, and I'd send the winner the dollar bill.

Not wanting to spend $0.45 for nothing, you keep bidding, to $0.95. You're the high bidder. The runner up is at $0.90 and has a choice: Lose $0.90, or up the bid to a dollar and break even. At which point your $0.95 cent bid is the runner up. But, you reason, a bid of $1.05 would cut your loss from the full 95 cents to just a nickel.

There is no logical end to this sequence -- once you start, you're trapped in the logic of ever-escalating investment whose sole goal is to cut your losses.

The dollar auction closely resembles the logic behind investing more time, money and effort in challenged business projects. It goes like this: "We've sunk so much money into this that pulling the plug would be political suicide. We're better off biting the bullet and seeing the project through." In dollar auction terms, it's preferring to lose another dime instead of the entire last bid.

Sometimes, but not always, this logic makes sense -- the extreme case is a project that needs one more week of funding. A business would be foolish to refuse it, simply because the project team missed the deadline.

The challenge governance committees face is recognizing the difference between dollar-auction situations and projects that deserve additional investment. Here are some indicators that you're looking at a dollar auction:

  • Goals: They no longer make business sense. Times change, situations change, projects stretch out. The idea has become obsolete, without ever having had a chance to be state of the art.
  • Scope: When a project team has re-chartered itself with broader and more ambitious goals or deliverables, very often it's because the team is failing to meet its deadlines. The broadened scope gives it breathing room.
  • Plan: Look for holes -- single tasks that will take a month or more to complete, tasks that have been 80% complete for more than two weeks, or worst of all, daily improvisation with no plan at all.
  • Optimism: The project manager uses the word "hope" to describe any part of the plan. "Hope" is the work-breakdown-structure equivalent of the famous Sidney Harris cartoon physicist whose mathematical proof included the step, "... and then a miracle happens."
  • No demo: If, by the time the question comes up, the project team can't show working technology in action, it's likely the technology will never work.
  • Testing: If the project seems to be stuck in the testing phase ... if the bug list isn't shrinking on a weekly basis ... the code, to use the technical term, "sucks."
  • Team: Project teams have to be fully committed to the project's goals. This means project teams are required to lose their objectivity, and believe, deep inside, that the project will succeed. So if the project team recommends shutting things down, the situation has to be seriously awful.


No one indicator is definitive. The rating system:

1 or 2: Fix the issues, and go forward.

3 or 4: Worry, and conduct an external review before proceeding any further.

5 or more: The request for additional funding is a dollar auction, and the project is a zombie -- the walking dead. Put it out of its misery.

Then burn the specs, just to be sure.

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Copyright and other stuff -- The great KJR link point

Tuesday, October 9, 2007

Still not tax deductable

10/8/2007

Thoughts from an Oregon vacation:

Experts experience a different world (1): In Sideways, Miles and Maya (Paul Giamatti and Virginia Madsen) have a deep, touching conversation about Pinot Noir. They sipped their wine and envisioned the work of growing the grapes, the weather, the scenery, the vintner's technique ... entire vicarious lives.

I experienced flavor.

Relevant IT insight: When non-technical managers overhear a conversation between two engineers and have no idea what's being said, many shake their heads and roll their eyes. They should be delighted.

Experts experience a different world (2): When you tour wineries you mostly taste young wines -- in our case, 2006 vintages. A young Pinot Noir really doesn't taste very good to a palette as unsophisticated as mine.

A wine connoisseur can taste a 2006 Pinot Noir and predict when it will be ready to drink and what it will taste like ... and enjoy the future flavor now. Great vintners taste the grapes and know how to create that flavor.

Relevant IT insight: By the end of the design phase of any systems effort, at least one person in IT, and another in each affected area of the business, must be able to envision the experience of using the future system. Otherwise, while the new system might meet all requirements and specifications, it will still be a mess.

What you like and what you should ask for aren't always the same: My wife and I generally prefer red wines. As most of the wines were quite young, the whites were far more enjoyable.

Relevant IT insight: When making management choices, what you like doesn't matter at all. Base your choices on what the situation calls for. Anything else is your ego at work.

You can't optimize for everything: Joe and Shari Lobenstein -- the proprietors of Loebenhaus, our wine country Bed and Breakfast (highly recommended) -- also grow a small grape crop. Joe invited us to taste his Riesling and Pinot Noir grapes, which were ready to harvest.

The flavor was astonishing compared to supermarket grapes. So were the seeds, which make up a lot of these grapes.

It's too bad, but you can't get the flavor without the seeds.

Relevant IT insight: IT optimization also involves trade-offs. Move to a higher-bandwidth technology and you might find you've increased latency to unacceptable levels. Adopt a highly scalable process and you'll likely find you've increased overhead costs, reducing your flexibility.
And so on.

The outside view tells you little about the inside view: You can only taste so much wine, so we spent an afternoon at the Evergreen Aviation & Space Museum, the final resting place of Howard Hughes' legendary "Spruce Goose."

From the outside it looks like a very big airplane. When you enter and look the length of it, enormous looks small in comparison.

Relevance to IT: For business management, the experience is features and functionality. For business users, the experience is the user interface. Both are important. Neither provides useful information about what a system looks like from the inside.

But you already knew that.

Sometimes, what you get is better than what you'd planned: One of the exhibits was a Boeing B17G Flying Fortress -- the workhorse bomber of World War II.

Bill Jarvis, the volunteer who showed us around the B17, piloted 30 missions over Germany in WWII, starting when he was 18-and-a-half years old.

On Bill's last mission the Germans finally shot him down. He crash-landed in a sugar beet field in Luxemburg. Allied troops immediately took the entire crew prisoner, not sure if they were really Americans or were Germans trained to infiltrate.

After weeks of imprisonment and interrogation, Bill finally had enough. He told the MPs, in terms that weren't uncertain and were laced with every cuss word he could think of, that he was going to see the General and they'd just have to shoot him if they wanted to stop him.

When he swore at the General in similar terms, the General concluded he had to be an American -- no German could have had such a colorful vocabulary -- and freed Bill and his crew.

Bill's story is too long for this space, so you'll just have to visit him at Evergreen. He says about half of it is true, but he can't recall which half.

We'd planned to admire airplanes. Our best experience was talking to a World War II pilot.

Relevance to IT: In the end, technology and process are never as interesting or as important as the people who use them.

But you already knew that, too.

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Copyright and other stuff -- The great KJR link point