What’s the balance?
How do you balance employee interests and owner interests? Customer concerns and management issues? The goals of all stakeholders—owners, employees, clients, and communities—should be considered.
They key word for all these parties is equity. Equity as in people inside and outside the firm feel they are being treated fairly. And equity in the sense that employees have a proprietary feeling about the business—a sense of ownership, that what they do and how they do it makes a difference to everyone’s bottom line.
The ideal compensation plan is contextual: it’s tailored to the type of business and the stage of growth that the company is in. And it’s meaningful—the incentives are large enough to have a material impact on someone’s behavior. Goals have to be specific, achievable, and tied to the firm’s performance. And some of the incentives should be deferred. If employees leave, they should have a real sense that they are leaving something behind.
One of the unseemlier sights in the financial industry is the annual “bonus shuffle” that happens every spring. After annual bonus checks are cut—usually sometime around March—many top performers go job-hunting, searching for another big score. Because too much of their pay is tied to short-term performance, they don’t have much reason to stick around. And the nature of accounting is that while the financial payoffs can be seen up-front, many of the underlying risks aren’t visible for years. Employees should feel the same concerns as owners—concern for the bottom line, concern for the business’s long-term viability, and concern for other team members.
Photo: Dave Meier. Source: Picography
Finally, a good plan needs to be simple. People shouldn’t need a spreadsheet to figure out what they’re being paid. If a plan is too complex, workers just forget about it and fall back on what they know—and managers lose the ability to structure the business and change the culture.
A good incentive system is like a good relationship: it has short-term, medium-term, and long-term objectives. Each of these contributes to a firm’s success—something everyone wants. But if folks fail to plan effectively—balancing all these objectives—they’re effectively planning to fail.
Douglas R. Tengdin, CFA
Chief Investment Officer