What Are You Worth?

May 18, 2007  |  Michael Wurzer

I have the privilege of running a company with 36 employees. With that privilege, I also have the responsibility (at least indirectly) of determining how much each of these fine people are paid. For anyone who hasn’t had this glorious task, let me be clear: it sucks.

First, though the competitive market for the job in question should make determining compensation easier, the reality is that there is no “market” rate for the person sitting in front of you. Everyone brings a unique set of skills and experience to the table that makes it nearly impossible to use general job category statistics. The closest you ever get to a “market rate” for any particular person is when they have an offer from another company, and that’s usually too late.

Second, things that really matter to the employee (their financial needs and wants) don’t matter to the employer. What matters to the employer is the contribution of the person. Don’t get me wrong, employees care deeply about their contribution, but the point is that the employee also has personal interests that make negotiations over compensation less than enjoyable or effective.

Third, at least in our business of software development and support, measuring contribution is nearly impossible and almost certainly futile. Lines of code, numbers of bugs, numbers of calls resolved, time of call resolution, etc., are flawed concepts. In fact, all measurements will produce what I call the bubble-wrap effect — if you push down in one spot a problem will simply pop up in a different spot. Moreover, there are plausible arguments that incentive based compensation plans actually thwart creativity. Basically, creative people get annoyed by any attempt to “lure” them into doing a better job with one carrot or another. These attempts at “management” have made Scott Adams rich.

With market forces, personal negotiation, and measurement all relatively ineffective, the end result is a gut level decision. Isn’t that great? Compensation becomes a nearly arbitrary decision specifically checked only by the employee looking elsewhere for a job. Fundamentally despising that part of my job, I studied compensation theories for the better part of three years, trying to figure out something that was fair, transparent, easy, and effective.

First, I read through books like The Great Game of Business by Jack Stack, Bringing Out the Best in People by Aubrey Daniels, and Managing Through Incentives, all of which are excellent books advocating some sort of measurement and incentive compensation system. We even tried some of the ideas for awhile, unsuccessfully. I next stumbled on this post from Joel Spolsky, which led me to the books linked above describing how incentive compensation plans are destined to fail in software companies. Having been floundering around with such plans, Joel’s analysis really made sense.

Yet, that simply left me stuck. Compensation needs to retain the employee and needs to be related to their contribution (i.e., fair). I partly solved the “retention” issue by targeting our salaries and other benefits slightly higher than what I saw as the “market” rate for each position. This worked for awhile but, over time, things can easily get out of whack as the overall market matures or shifts relative to the maturity of your own team.

To combat this and also to try to address the fairness issue, we turned FBS into an employee-owned company. What this means is that each employee of FBS who is here more than six months gets awarded FBS stock as part of their compensation package, and 100% of FBS is owned by the employee stock ownership plan (ESOP). The value of FBS’s stock is determined on an annual basis by an independent valuation firm. So, even though FBS is privately owned, we have a stock price and that stock price or valuation is a reflection of the contribution each of us makes to the company as a whole.

In other words, the stock price and share awards are our performance measurement and incentive compensation all in one. I think this plan works because the success measurement is at a high enough level that there is little risk of creating unintended consequences, and because the small size of our company gives each person an opportunity to see how their individual contributions impact the whole. Actually, we’re working on this last part right now, trying to integrate our strategic planning around the financial metrics and working them down into all levels of the organization to give everyone a better idea of how they can help improve the stock price. So, we’re still walking the tight-rope to a degree, but I feel like we have a good framework that meets the goals of transparency, ease, fairness, and effectiveness. Our stock value went up 160% last year, so something must be working.

16 Responses to “What Are You Worth?”

  1. I’ve worked in virtually every size company, from a multi-billion-dollar, 5000+ employee, publicly-traded corporations to a 4-man software shop.

    Compensation by market is always problematic, particularly moreso the smaller the company: The smaller you are, the more hats an individual wears, and the less they conform to public roles/titles. At MegaCorp, it was very easy to say “Jane is a Level 3 Product Manager”: there were specific duties, specific assignments, and you could judge her against her performance in key results.

    However, one tool taken from MegaCorp that applies everywhere is the 360-degree review. I cannot praise these enough as invaluable guides to employees or managers. Send evaluation forms for an employee to them, two peers and their manager. 15-20 targeted questions can yield remarkable insights into A) the employee’s recognition of their contributions, B) shortcomings that neither the employee nor their manager sees, C) oversight for positive contributions that their manager doesn’t see. In the end, it makes it much easier to say “the average raise is 5%, you get 4.5% for this-this-and-this reason. Let’s make a plan to improve these areas for next year.” It works!

  2. We’re working on integrating learning teams into our strategic planning process in 360 degree fashion. We won’t apply it to salary reviews in any way, but the concept of wholistic input and continuous feedback is included. In terms of applying a 360 degree review to compensation, there are several problems: (1) either the questions/criteria are known before the performance is rendered and then targeted by the employee with the bubble-wrap effect or the questions/criteria are not known ahead of time in which case you end up with the end-of-year whiplash effect from the employee not knowing what hit them, either good or bad; (2) even with a transparent and well-targeted (lucky) metric, at the end of the day, someone still has to make a decision about that percentage and all the feedback in the world doesn’t help make that number any more or less objective; and (3) in a small company, wrapping such reviews into compensation is volatile potentially. To sum, 360 reviews can be valuable employee growth and learning, I just don’t think they help decide compensation. I can’t remember who said this, but effectively the idea is that compensation should be like the Ronco ovens, “set it and forget it.”

  3. [ the questions/criteria are not known ahead of time in which case you end up with the end-of-year whiplash effect from the employee not knowing what hit them, either good or bad ]

    We _never_ knew the exact questions ahead of time, but I don’t see how a Likert scale can be a surprise. The collective result may disappoint them, but if two peers and a manager agree that something is lacking, I doubt it’s a “surprise” — that goes into the realms of Stephen Covey’s “image” mentality, but is a whole ‘nother discussion.

    Most often, the collective result is a fair judgment on performance (even performance on a social-dynamic scale), usually in the 4-5 points-per-answer range, with the occassional 3 (maybe even 2) in problem areas. My point being that this basis (pseudo-concensus) for a meritorial salary increase is much more realistic than a manager’s gut first reaction, which can be more easily biased by timeframe, scheduling, interpersonal differences, or simple perceptions.

    I’ve never been unhappy with a 360 review. It always (as an employee) left me feeling like I had a sense of direction for the coming year, as opposed to the “keep it up” that is otherwise so common.


    (please delete previous comment — double angle-brackets munged it)

  4. So was your performance against the direction set for the coming year the basis for adjusting your compensation at the end of the year? Or was the end of the year not used the year after? My experience with end of the year reviews is, “Gee, thanks for telling me now when I have no opportunity to do anything about it.” If the criteria are set out before-hand (i.e., at the end of the year for the next year), the likelihood that the criteria will be set well is low given how quickly needs and circumstances change. I think immediate and continuous feedback is the only feedback worth providing, and tying feedback to compensation deprives the feedback of the learning opportunity. If you’re interested in this topic, check out Austin, Deci or, more radically, Kohn, all of which are linked in the post. The idea that compensation is best off divorced from performance seems counter-intuitive but it has proven true in my experience. Of course, performance is always an issue, but the issue is whether you are going to retain the person or not, as opposed to whether you are going to give them X% raise or not. If you are going to retain them, then you need to pay a salary that will do that — period. This is why I think making every employee a true owner is the best management and compensation structure possible. If embedded within the organization (which isn’t easy), a true ownership mentality creates a 360 degree review in the most efficient manner possible on a daily basis and not just once a year.

  5. While profit-sharing is an easy way to compensate based on company performance, it does not (necessarily) enhance or encourage the work ethic of the employee. Moreover, it creates the possibility of exerting the least amount of effort in a given group, provided that the others perform at or above par (perhaps even to compensate for such a “boat anchor” individual). In which case, you’re stuck right back where you started with an arbitrary system, unless you tie the employee’s performance to the company bottom-line performance… and round and round we go.

    At Autodesk (may as well say it, you’re the only one reading at this point), we had specific quarterly milestone meetings with our managers reviewing the goals set the previous year and updating the EOY course as needed, sometimes meeting as a team (when appropriate — I was on a team of 3 so it was fairly easy). And perhaps this is counterintuitive itself, but many of our goals were not focused on performance metrics: they were incentives to explore our abilities and learn new skills. I learned C++, [Auto]Lisp, JavaScript, SQL, and various mapping technologies while my real “job” was Imaging support and later writing & editing techdocs. BUT, some goals were focused on key metrics that really did quantify performance, such as # of articles edited, # of calls closed on first contact, etc.

    Even as a programmer, I honestly think you can quantify some aspect of any job (regardless of Joel’s ideas for gaming the system); not every number can be fudged, and you definitely can’t fake releasing a feature.

    The irony to Joel’s perceptions lay in how often he cites successes created by a single (or couple) individuals at Fog Creek. AJAX in FogBugz, one guy… Copilot, conceived by one intern… the list goes on. Should those breakaway employees not be compensated especially for their contribution? I think they should, but simple part-ownership only rewards the whole.


    PS- I did get some stock options as merit bonuses, but it was never part of my overall compensation.

  6. Even if we are the only two engaged here, there may still be learning opportunities for the two of us. Or perhaps others are reading, too. Actually, I suspect everyone at FBS is watching this thread quite closely. 🙂

    Should those breakaway employees not be compensated especially for their contribution? I think they should, but simple part-ownership only rewards the whole.

    I don’t understand how part-ownership only rewards the whole. Shares are owned by individuals, not the whole. The reward is individual. If what you mean is that the company is valued as a whole, that’s true. But what other valuation method is there?

    Certainly, if you have a star employee, you need to compensate them at a high enough level to retain them. What I have found difficult is finding some formula or measure for determining that compensation level on a consistent basis. Further, I submit that the moment you inject any subjectiveness into the process, it’s essentially all subjective. If that’s true, then acknowledging that up front is beneficial.

    Measurement or valuation outside of enterprise valuation is a chimera for management consultants and managers who insist on clinging to some hope that management is more science than art. Gaming isn’t the real concern with measurement. Rather, the concern is that any metric chosen will more likely than not result in unintended consequences. For certain, if you tie compensation to a metric, you will get the results for which you are measuring. The problem is that what you ask for, more likely than not, is the wrong thing or at least not the whole thing necessary. Austin proves this in his book quite well, I think.

    While profit-sharing is an easy way to compensate based on company performance, it does not (necessarily) enhance or encourage the work ethic of the employee. Moreover, it creates the possibility of exerting the least amount of effort in a given group, provided that the others perform at or above par (perhaps even to compensate for such a “boat anchor” individual).

    First, employee ownership is not profit sharing, which necessarily is short-term. Actual employee ownership, in stark contrast, is long term. The difference is analogous between renting (profit sharing) and owning your home (ownership). Do you care more about the apartment or the house in which you’re invested?

    Second, true owners do not tolerate ‘boat anchors.’ Boat anchors are lifted or cut off, and again the issue of salary returns to retention. If you’re retaining the person, the salary needs to accomplish that. That’s the core decision, retention or not, and reducing that to a metric is not possible or at least likely to result in errors. Once you’ve decided on retention, turning to true ownership for joining that person’s future with the future of the firm creates a virtuous cycle where each is looking out for themselves and the whole simultaneously.

    Perhaps fundamental to the difference between our views on this is the concept of ‘boat anchors’ versus ‘breakaway’ employees. At FBS, we’ve hired people who we believe will contribute to the whole. Implicit in this hiring decision and the decision to retain each employee-owner is respect for their contributions. At the same time, we reward star employees, too, and the ownership structure keeps on rewarding them. What the ESOP recognizes, however, is that everyone contributes. Everyone.

  7. First, I apologize in advance if I’m over-generalizing or super-paraphrasing… I’ve been heavily NyQuiled for three days, so my signal fidelity is probably quite low. Yet, I press on…

    I understand your emphasis on ownership and perhaps in a small company your position is more relevant. With 5000+ employees, one never has a true sense of ownership regardless of how many shares they may have, or any such sense is quickly dashed upon the rocks of reality once a boneheaded decision comes down from on high. If all of your employees’ feedback is taken seriously with respect to other employees’ performance, then it would seem that you already have the fundamentals of peer review in place, however informally. Of course, I’ll point to the fact that that model won’t scale, but you’re probably okay for now. 🙂

    My current company has grown from 80 employees to 170 (organically) in just three years, and I can assure you we’ve seen our fair share of altruistic management not standing up to the pressures of scheduling. Tiers and factions form out of the ether, and only coerced open communication keeps things in check.

    So, back to the issue at hand: Compensation. There are actually two facets to this problem — base salary and annual increase.

    Base salary is, to me, something that _can_ be objectively quantified. All of the employees who are reading are now paying much more attention. Rather than evaluating Jane on her particulars, imagine instead that you had to replace her. What would you offer her direct replacement? Probably a slight premium (10-15%) over prevailing wage in your market for the sake of getting a top-notch candidate, and that’s it. That’s the position’s value, regardless of the wonderful, unique snowflake already doing the job. We’ll take this value and call it X.

    Now we have to determine increases for our existing employees. There are three parts to this in The Matt System:

    First, there’s the stalwart annual increase that is expected of every employee outside of Microsoft. This is easy, and the formulaic love I was referring to earlier. CoLA+1% is the target; usually somewhere around 6%. Use the 360 Review to determine the portion the employee deserves. This shall be heretofore labeled “Annual Increase”.

    Second is valuation for the position in the market, for which we refer back to X. If X has outpaced our employee’s annual compensation, then the market has changed and we must correct. This commonly happens in hot jobs, and programming is a career prone to it. Particular skills can increase the market by 15% in a year due to simple demand, and our snowflakes should be paid fairly. This shall be labeled “Position Adjustment”.

    Finally, we need to consider the performance of the individual and the company as a whole. Assuming your company is profitable, you have a warchest of funds left over that need to be divided among all the things that love money, including employees. Take the percentage of your annual expenses that is Payroll and apply it to profit: that’s your performance compensation pool. Use it to thank those breakaway employees who have gone above and beyond expectation for their position, again, usually about 5% of their salary. If you *still* have money left over, that’s company performance bonus for everyone.

    So, in summation:
    Base + Position Adjustment + Annual increase + Individual Performance + Company Performance = Next Year’s Salary

    One problem with annual overcompensation is that you develop the expectation of excessive increase. Joel touched on it in his management pieces, and I’ve seen the effects of this secondhand. A few employees at our company had driven their salaries up to market + 30% (for continuous strong performance), to the point that they were now actually angry when they “only” got a 6% increase. By any outside measure, they are ridiculously overpaid, but it’s virtually impossible to decrease expectations. As one of my favorite former VPs once said, “you just can’t put that sh*t back in the horse.”

    By keeping the compensation segments _absolutely_clear_, you never have hurt feelings, excessive expectations, or a payroll that’s out of control.

    But that’s just my two cents. 🙂


  8. Whoa, one big correction: “Next Year’s Salary” should read “Next Year’s Compensation”. Sheesh.


  9. Robbie says:

    Once upon a time, I worked at Microsoft. And let’s just say that
    Stack Rankingis an approach I would highly recommend you avoid practicing.

    Hopefully, none of your employees will start a Mini-Microsoft type blog and air all your dirty laundry if you do screw it up.

  10. Matt: Yep, I think you’re right. Big companies, bad. Small companies, good. Your “formula” proves my point. It’s all made up. Why is 5% right for a “break away” employee? You just made that up, pulling the number from thin air, when it truth it bears no relation to actual value created.

    Robbie: Given that I’m stuck in a hotel with no change of clothes due to weather delays getting me home, your dirty laundry comment is very appropriate. Seriously, I can’t say I’ve read the entire Stack Rankings link you provided, but from what I did read, it is the result of exactly the type of “management” that prevails in big companies where managers have nothing better to do than make stuff up to annoy people getting stuff done. Count me out.

  11. 5% wasn’t really arbitrary, since it is A) around CoLA, and B) a “reasonable” round number. Would you raise the price of your products 4.6%?

    I wouldn’t necessarily give a breakaway employee more because it would create an unreasonable expectation. Let’s say that one of your whizzes has an idea for a new feature and implements 90% of it on his own (assuming there’s QA, etc.). Through the next round of sales calls you bring in $3M more in revenue than forecast and a number of those MLS reps were impressed by that specific feature. Should you raise that developer’s salary far beyond market value? Only if you expect that developer to deliver such features _every_single_time_. The reality is that that employee’s role hasn’t changed, his market equivalence hasn’t changed, and there’s nothing to say that a replacement wouldn’t have come up with the same thing. To me, it’s meaningful enough to give them a generous bonus (which 5% is) and use the remaining additional profit to invest in everyone’s job satisfaction (buying nicer PCs than you would have, free lunch, etc.). You’ve rewarded a one-time exception with a one-time benefit, and driven retention across the boards instead of with one employee.

    I do still have a couple of problems with the notion of employee ownership beyond profit sharing (e.g., company performance bonuses). 1) If the employee stockholder actually maintains shareholder rights beyond employment, then you don’t have a retention tool, and 2) unless you are preparing the company for a windfall event like a buyout, the financial compensation of being an employee-owner probably wouldn’t stand up to a job offer from Google.

    I still think Autodesk has/had the best approach: foster a corporate culture based on enriching employees’ professional and personal lives, and compensate _fairly_. They have one of the highest retention rates in technology, with the average employee at the company 7-12 years. I left (after three years) to chase the dot-com boom and I still miss the environment five years later.


  12. Matt, c’mon, just admit it, there isn’t a formula. I’m not saying you didn’t rationalize your number to yourself, I’m saying the number you selected (in this case, cost of living) isn’t in any way tied to what the employee did or the value created. Despite this, you insist that picking that number to reward an employee for “breakaway” performance is “reasonable” or “fair”, two words without definition. It would be just as “rational” or “reasonable” to choose 75% of CoLA or 125% of CoLA or some other “round” number. Again, you’ve just proven my point: the decision always — always — comes down to someone having to make a judgment call, yet the point of my post in the first instance is that these judgment calls are important to real people as individuals. That’s scary. I think that’s why people try to create all sorts of numeric legitimacy to the decision, because they are scared of the abyss created by the uncertainty. And that’s why I think it is so important for managers and employees to recognize that there isn’t a formula and that compensation isn’t some judgment on worth or value of the individual. Rather, compensation is what has been agreed by both parties at that moment as a payment for working at the company and not somewhere else. That’s it. Nothing more.

    Regarding your reservations about employee ownership:

    (1) At the core of employee ownership is personal freedom and control over your own life. Lashing the employee to their desk with a financial penalty for leaving is not part of the program. That being said, pre-vesting, there is in fact a retention benefit for an ESOP but that isn’t the reason for its being. The reason for its being is to allow people to build capital for themselves and take control of their lives.

    (2) I have no idea what you mean by comparing an unspecified compensation package or ownership plan against an unspecified compensation package from Google. [shrug] Of course, if someone has a better offer from any company, they should take it. That has nothing to do with employee ownership. In fact, employee ownership would encourage just that sort of decision making. (As an aside, one of the great things about a privately-owned ESOP is that the company is required to purchase the stock back from the employee upon termination. So, the company does not have to chase the liquidity event in order to provide ownership transition, which is one of the most difficult stages in creating a lasting small company. In an ESOP, the ownership transition is pre-defined.)

    At the end of all this discussion, I hope you and anyone else who may be in the position of determining others’ compensation thinks long and hard about hiding behind formulas and convincing themselves that employees are better off as non-owners. As I said in my post, that’s the kind of thinking that made Scott Adams rich.

  13. While I appreciate the passion of your argument, I don’t think you’ve come to any better realization of objectively rewarding employees or guaranteeing retention. If the ESOP is granted to each employee subjectively (assuming you don’t give the same number of shares to a secretary as you would a product manager), then you’ve again introduced an arbitrary decision of employee value, on top of the potentially arbitrary salary, and the potentially arbitrary annual increase.

    Who determines next year’s budget for cap-ex, marketing, and research? Does profit go to the shareholders? Is the ESOP just virtual liquidity to the shareholders, or do they get dividends? Do you award shares in lieu of cash bonuses?

    I think your company’s continuing success has far more to do with strong leadership and a solid culture than any tangible benefit to the ESOP.


  14. The stock valuation is dependent on the results of operations, which is not subjective.

    Just like other companies, we have a Board of Directors, officers, etc., charged with the responsibility of running the company. Unlike other companies, we involve our employee owners in decision making from strategic planning to operational details.

    You’re right that the success of our and any company is dependent on our culture, but, importantly, we’re cultivating an ownership culture here at FBS, and that makes all the difference in the world. People can talk all they want about involving employees in decision-making, “empowering” employees, etc., but without taking the next step of giving employees actual ownership, those efforts rarely last. To be sure, providing ownership without an ownership culture also will not work, you need both. When you have both, though, that’s the winning combination.

  15. Robbie says:

    I think cultivating an ownership culture is a great move. Microsoft was a much better company to work for in the 1990s when they had employee stock options. In the 2000s they moved to employee stock grants, started to penny pinch, and the negative effects of the stack rank came into sharp focus. The company stock price has been stuck in neutral ever since.

    Although, I realize fairly rewarding ~70,000 employees in publicly traded company can pose a very different set of challenges than fairly rewarding ~40 employees in a privately owned company. However, learning from giants will hopefully prevent you from repeating their mistakes.

  16. […] Owned Tuesday, June 15, 2010 9:36 pm Author: Michael Wurzer | No Comments Over two years ago, I wrote about some of the research that spurred me on to make FBS an employee-owned company. That research is summarized really well by this RSA video created for a Dan Pink […]