Just rewards: it's not so much what someone is worth as what you want a pay package to accomplish that determines executive compensation

Folio: The Magazine for Magazine Management, Nov 1, 1990 by James B. Kobak

Just rewards

The subject of executive compensation is a two-sided question with more than one--or two, or three--answers. Either management is dissatisfied with the plan as it affects the company, or the executives are dissatisfied with the plan as it affects them as individuals.

The basic problem, of course, is that man is an irrational animal. So, when you get one irrational animal who believes he is the reason the company is doing so well and therefore deserves more than the pittance he gets, and another irrational animal who cannot understand how this dumbbell gets through the day and why he is so grossly overpaid, negotiating about the thing nearest and dearest to both their hearts--money--is difficult, at best.

All sorts of factors, emotional and otherwise, come into play:

* The boss may be unwilling to let go and give others the authority to act on their own.

* Different people contribute more or less at different times, so a plan that is good today may be worthless in another year.

* Some people, rightly or wrongly, are perceived to be winners; others are seen as losers.

* The boss may think, "I started this company and there wouldn't be anything here if it hadn't been for me. So why do I have to overpay everyone else?"

* The executives may think, "He may have started it, but it was being run like a candy store and probably would have gone under unless I had joined the company. Why should he get all the rewards just for having one good idea? And when is he ever going to get rid of that worthless nephew of his?"

* The boss may think, "If the executives ever find out how profitable we are, they will all be in here asking for raises."

* The executives may think, "The old man really has no idea of what is going on in this company. How can he understand what reasonable compensation is?"

Another difficulty in determining compensation is to decide just what makes a valuable executive. Is it the one who brings in the revenue? The one who reduces costs? The one who starts a new project? The one who builds the largest department? The one who got the company through its latest bankruptcy?

What's the goal?

And then there's the big question: What's the purpose of compensation anyway? Basically, I suppose, it is to give a fair day's pay for a fair day's work. But a good compensation system can help do so many other things: increase profits, increase the company's value, promote teamwork, enable you to keep your good people, enable you to lure new good people, help get rid of deadwood employees, reward people for spectacular performances, reward people for good new ideas, help the company reach its goals, save money, increase sales, give employees a feeling of security if incapacitated or on retirement, give employees a sense of their own worth, inspire loyalty and get people to walk that extra mile.

The list is probably endless. But a good compensation system can accomplish each of these objectives to some degree, in the short term or the long. Which is not to say that a single compensation plan can do it all--but you can try.

If you follow baseball, you know how difficult it is to rate one first baseman against another. And that's a game in which every detail--batting averages, stolen bases, RBIs, fielding chances, errors and length of pants--is recorded. How much more difficult rating is in business, where you can rarely measure things very carefully, where success is often the result of a number of people doing very different jobs, and where human relations (contact with bosses, fellow workers, customers and who knows who else) complicate the picture every day.

In the publishing business, you would expect that the easiest compensation system to develop would be the one for the ad sales people, since you know the number of pages and the sales dollars each person has generated. But it isn't that easy, because salespeople may have had less to do with the amount of advertising generated than it appears. Ads may have come in because the editors were doing such a great job making people want to read the magazine, or because the circulation people were able to get exactly the readers that advertisers wanted, or because the promotion department offered advertisers a free trip to Paris.

The truth is that there are an infinite number of ways to compensate salespeople, that no publisher is 100 percent happy with the plan he currently uses, and that in the end, everything is almost guaranteed to become an annual negotiation with each salesperson.

This is not very encouraging for developing a lasting compensation plan for all executives. But don't give up yet.

The compensation-planning process has to start with a definition of "executive." My simplistic approach is to say that anyone who has a real influence on a company's profits is an executive. Suppose you simply assume that anyone who has enough authority to be accountable for making and meeting his own budget in a ground-up budget system is included (see FOLIO: "What publishers should know about accounting," February 1988, page 96). That definition can include a lot of people, which is probably good.