Developing a Compensation Framework

Decisions that involve emotion and have long-term implications are tricky, and what you pay any individual at your firm qualifies on both counts: tricky and long-term. My suggestion is to develop your own framework for compensation decisions to swing from emotion to logic and to avoid a long-term problem.

A Suggested Framework

The idea is this: every time you need to make a specific decision about an individual, you test your thinking against a set of core principles that remain constant. Here’s my suggestion about how to do that, in order, written from your vantage point:

1. The Business Must Serve Me. My own compensation must be normalized. It’s not enough to love what I’m doing and to be particularly pleased with the team: long-term, this business needs to provide sufficient compensation to keep my interested, to plan for my own future, to show a potential buyer why they might want it, and to reward me for the risk and the mental load. (We normalize your compensation when we benchmark or conduct a valuation of your firm, but the quick rule of thumb is that you should be making significantly more than most everyone else, despite any distributions on top of that.)
2. Some Employee Churn Is Acceptable. I can accept that some employee churn, if for the right reasons, does two things for our firm: it keeps compensation manageable without overpaying individuals, and it introduces new blood into our system. Our firm’s capabilities are changing rapidly, and so it’s only natural to assume that we need a constant stream of new people to upgrade our abilities faster than most individuals can learn new tricks.(More on the idea of employee and client churn in this episode of 2Bobs.)
3. I’m Working Within a Salary Cap. Our total unburdened compensation, including an appropriate amount for me, should not usually exceed 45% of our fee base. That leaves at least 20% for profit and 35% for everything else (benefits, bonuses, taxes, software, hardware, travel, etc.). If I make $350k and Lisa makes $170k and Leo makes $130k and two others each make $125k each, our unburdened comp is $900k, which means we’d need a fee base of $2M to support that. (More on some key metrics in this article and a full explanation of all of them in this manual.)
4. The Money Must Come from Somewhere. When I feel strongly that I should retain a specific employee by paying them a bit more than I would have originally liked, I must balance that by deciding, specifically, where it will come from: using a contractor, near- or far-shore, less-experienced employee who will require more training, etc. It won’t just “work itself out”—where will the money come from, because I’m not willing to lower my own compensation or exceed the 45% cap. If I can’t specifically make that tradeoff, I am stating that I’m willing to reduce our profit by that amount, and that’s a good investment because of a very specific investment I am willing to make in the short-term.
5. I Won’t Be a Willing Hostage. When a team member tells me of an offer they have received, reluctantly asking me if I want to match that offer so that they can stay, I have already lost the battle. My approach should be to always pay people fairly, initiating that myself, rather than respond to the marketplace as an auction for my team’s services.  I will let them go, but I will commit to regularly reviewing those situations on my own initiative in the future. And I will celebrate their contribution as they depart.

Seeing the Bigger Picture

There you have it. Just walk yourself through this matrix and it might help you stay on track. If you get compensation wrong, it’s very difficult to get everything else right, and it might be years before you can slowly bring it back in line.

These principles are timeless and geographically agnostic and are the same regardless of whether everyone works in a central office or remotely.

Your job as principal is to solve this and not blame it on external factors. Be optimistic, and view it as an ideal time to move from a scarcity to an abundance mentality.

Two Bonus Ideas

You may have already incorporated these next two ideas into your policies, but if you haven’t, I would guess that:

• If you are flexible about where people work (i.e., they aren’t regularly required to come into an office), you will no longer factor location into their pay. If you don’t require them to live in any specific locale, where they live will be their choice, and the cost of living will be their issue and not yours.
• Not only will you publish salary bands for every position, the actual pay for each individual will be disclosed to the entire team. They usually know it anyway, but having no secrets around pay will make your management of compensation easier and quite a bit fairer. Sunshine is a disinfectant.

I’ve slowly come around to that second idea over time. I do think “salary transparency” is going to take over the workplace within the next ten years, and I’ve come to believe that it’s a good thing. There are certainly drawbacks, of course. The biggest is that we tend to value people based on what they make and it’s hard to separate their value as humans and their contribution, but we’ll just have to be more grownup about it.

Two Required Commitments

How are you going to operate like this? It’s just not going to work very well unless you are also committed to two additional things:

1. You put processes and systems in place to eliminate SPOF (single points of failure). One of my clients requires a mandatory one-month sabbatical every year, for every employee, from the very beginning. Regardless of what you think of that policy, it requires them to be able to operate well without being dependent on single individuals.
2. You must always be in recruiting mode. Just like we fix your positioning and then help you craft a lead generation plan in our New Business Audit, you should think of your internal positioning as your culture, and you should always be looking for great team members. They are actually more difficult to find…and more important to your operation…than clients.

You may enjoy being the coach of your franchise, but you’re the general manager, too, and making the right decisions makes your life easier.