Stop Trying to Make Compensation Fair
I talk to people about how they feel about compensation, like a lot. Every friend, sales rep, barber, Lyft driver, and barista has been asked two questions “How are you paid?” and “How do you feel about how you are paid?”
The findings of my non-scientific survey is that basically no one feels like they are paid fairly. Before you blow the rest of this off and say “of course everyone wants to make more money”, as I say time and time again; it’s not about the money. When I dig in, it becomes clear that compensation isn’t really about being paid fairly, it’s about being valued. As a result, when Rev Ops and Finance approach compensation planning cycles with fairness in mind, we run into two problems:
1. “Fair” isn’t absolute, it’s relative.
The first rule of compensation is: Everybody knows everybody’s compensation.
People talk, especially after a couple of Chili’s electric margaritas. You can’t stop that. And after those margaritas, it’s natural to look at peers and say, “well, gee, I bring the same skill and effort as this person, but we aren’t paid the same. Does the company not view my contribution as equal?” Measuring our value in relation to our peers is necessary because the value we contribute to the company is harder to measure.
2. Luck isn’t fair.
Every time I’ve played bingo, I have won at least one round. It’s weird and hard to believe, but I defy the odds. I just might be the best bingo player in the world.
We are notoriously optimistic about how much our skill and effort play into positive outcomes versus pure luck. Not surprisingly, with a more objective perspective that calibration tends to become increasingly accurate. The reality is that all deals are won or lost as a function of skill, effort, and luck.
Think of that seven figure deal that was won by an inside sales rep in a week. The perception of the role of luck in that deal will decrease performance from the rest of the team because they feel the winning rep’s outsized payment wasn’t based on the effort or skill that they’ve been putting in. (This is a part of the reason why researchers have found that ranking your team doesn’t work.)
So what works?
1. Aim for equal.
Equal pay and pay structures for equal expectations.
Almost everyone overpays for “experience”. If experience means that person is able to handle a bigger territory or more complex accounts, then they should be paid differently. If a rep with 3 years of experience has the same expectations as a rep who is brand new, you should probably be paying them the same amount.
2. Minimize luck.
Luck deteriorates motivation and collaboration. Measuring on outcomes alone undermines fairness.
Measure and compensate on additional metrics, like exit criteria captured from discovery meetings, demo feedback captured, or responses to proposals, in addition to outcomes. These types of metrics solidify the right behaviors, and compensate reps on skills and effort. If you are in finance or ops, your job is factually to make the business more predictable. Why wouldn’t you do this?
(Note: I intellectually understand that I’m not gifted at bingo, but am still confident I will win if I show up.)