In my continuing research on compensation models, I was led to two different articles that offered interesting models on how to structure compensation. One article focused on how to structure compensation for a legal firm’s partners and the other was “The Hacking Business Model”, which offered a compensation model and complete structure for creating a company for distributed software development.
The Partner’s compensation plan primer is an interesting read. It highlights that compensation is tricky because employees desire a sense of “fairness,” but people’s definition of fair is different. The recommendation for legal firms is for them to decide compensation plans a year ahead of the compensation review, and support decisions with records that are comprehensive, reliable and available. Basic questions that need to be addressed are: (1) Who makes the allocation decisions? (2) Are allocations based on percentages or units of participation? (3) Are distributions allocated based on prior work or when current the year is complete? (4) Will profits be distributed and how much will be allocated for overhead? (5) Are there principals that get compensated regardless? The article re-enforces the notion that whatever model you choose, a) you need to create the expectation among the employees that the plan will change for continuous improvement and b) you will communicate the changes ahead of their implementation.
The “Hacking Business Model” is a model focused on creating a worker owned company and implements an open compensation plan. When I first showed this to some of my friends, their initial reaction was to quote Monty Python and the Holy Grail:“We’re an anarcho-syndicalist commune.
We take turns to act as sort of an executive officer for the week.
But all the decisions of that officer have to be ratified
at a special biweekly meeting
by a simple majority in the case of internal affairs.
– But by 2/3rd’s majority …”
Despite the similarities to humorous sketch, I like the Hacking Business Model’s attempt to lay out not just a compensation plan but a documented philosophy and approach to how the business is focused, how it is structured and how it is allowed to change. The compensation model it advocates is vague on salary and simply states that pay is competitive, but does focus on the goal of the company being to generate bonuses. Bonuses are a function of hours worked (units of participation) and a VIP multiplier based on their relative importance to the company. Although I am not sure how many companies have been successful using this business model, it certainly is open and understandable.
Companies strive to have a “fair” compensation model. Since being “fair” is subjective, a better plan is to be clear as to how you compensate your employees, have a documented way to decide how compensation is determined, and the process for how it will change from year to year.