Using a Multiple as a Compensation Distribution Model

The US Federal Government has a person called the Pay Czar. In the wake of the financial turmoil of the last 18 months, there has been a justified interest in making compensation fair. How is it possible for companies that needed a bailout to survive are able to pay a bonus? Tax payer money shouldn’t be used for compensation. As a result, the Pay Czar has capped pay at the firms that needed bail out money.

I don’t agree with this tactic. The obvious recourse is that if you want these companies to rebound then you need good people to make that happen. By capping their pay, you are signaling to the talented employee to leave the industry. This could create a vacuum of talent. Another aspect to this discussion is the idea of “bonus.” A bonus to most people is the extra left over after a good period. But in banking, the term “bonus” is really a stand in for variable pay. It isn’t the extra left over at all.

What I was hoping to see come from this was a compensation distribution model where the top tier couldn’t make a certain multiple more than the lowest employee. I find this important because the current model makes it seem like certain performers are doing it single handedly. Just about all people who are successful are that way because of a great support structure. When you take someone out of a situation where they excelled and drop them into another situation, rarely do they achieve the same heights.

For the sake of the US economy, having a compensation distribution model of something like a 150 multiple cap would be great. Suppose someone at the bottom of the company makes a yearly income of $24,000. If you cap the highest person at a 150 times that number then that means they are paid $3,600,000. That is still a lot of money, but if they want to make more then they have to raise the tide for everyone. For instance, if this same executive wanted to make $4,000,000 then the lowest paid employee would have to earn $26,666. As the pay at the top is slowed, the pay in the middle and bottom swells. This is because of the sheer number of people at a slightly higher pay grade. These same people would buy more goods and services, as well as be taxed on this improved income.

Unfortunately, what we got was a knee jerk reaction. And the people being punished are the same people we want to lead. We should have focused on broad reform and not a bullying.

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2 responses to “Using a Multiple as a Compensation Distribution Model”

  1. I’m sorry, this won’t solve the problem. It’s too easy to circumvent (by, for example, spinning off the support staff into a separate company), and in any case it does nothing to prevent the whole organization from reaping excess profit. (See for example the salaries paid to Bernie Madoff’s minions…)

  2. I appreciate comments like this because it’s a healthy level of skepticism. Would having a multiple be potentially easy to circumvent? Sure, but what compensation policy isn’t? There are many benefits to installing a multiple system, but the main one is cultural. By making the lower level workers directly benefit from increased profit you motivate them to speak up more, thus eliminating the positive feedback loop (yes men). Another benefit is stunting the growing divide between the rich, the middle class, and the poor. Having a strong middle class is vital to the US.

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