The Compensation Conundrum

There is no perfect formula or science to compensation, but with most things in life, context is important.  Executive compensation is often chastised in the media and on the campaign trail, and sure, many of those cries may very well be valid.  CEOs are typically paid handsomely due to this high risk, high reward scenario.  If a CEO or other executive is not performing their job in a manner that is providing an added value to the company, shareholders, employees, etc., then they should be held to a higher standard than someone in an entry-level position.  They should be taking responsibility for a company’s shortfalls in the same way they gladly hold on to the spotlight during a period of productivity.  

That being said, I also have no problem with executive compensation that generously rewards those who provide invaluable insights and effective strategic management.  A good boss or senior leadership is often an underrated variable when evaluating a company.  A company needs to have a sound business model and quality product, but these are usually built on a company’s environment where employees feel that they are in good hands (and are directly or indirectly incentivized to stay with that company).

Looking at a recent filing, I could see firsthand that the highest quality employees are regularly not the highest paid ones and decisions surrounding salary compensation at lower levels are made in a vacuum.  The $5,000 raise that was denied to the hard-working manager (who might soon take their breadth of knowledge elsewhere) would have made a world of difference to them in terms of quality of life compared to the $25,000 raise to someone already in the highest tax bracket (otherwise known as marginal benefit).  These are theoretical scenarios that play out in companies of all sectors on a regular basis, but we don’t often talk about compensation as transparently as we should because of the associated stigmas and contention.

I wholeheartedly believe in market forces and labor markets are no exception.  I will leave the issue of minimum wage and living wage for another day; this issue is about those who already have somewhat well-paying jobs.  Compensation is a dramatic issue because it is the easiest way for someone to think they can view their perceived worth; on a historical level to their own salary and with their peers.  However, there are many factors that go into one’s annual base compensation numbers: previous salary history (anchoring is the worst); years on the job; other benefits; bonuses and quality of life/work-life balance; so even straight numerical salary comparisons are not as black and white as we might think.

The bottom line is that you should work hard and push for competitive compensation, but you should not be blindly motivated by salary alone.  Companies should also not be blindly motivated by titles alone; reward those who deserve it most and the company’s resulting outperformance should make everyone happy in the end.