Most people prefer the view from a mountain—not a flat plain. In fact, the only people who like the view of a plain are the people on top of the mountain.

By the same reasoning, not everything is equal in a company, nor should it be. Entrepreneurs sometimes treat employees like children. They feel this sense of responsibility for all of them and the desire to treat all of them as equal.

But parity among all employees in an organization is not a virtue, and in fact is often a company’s worst problem. When there are no differences in position, compensation, recognition, opportunity or ownership, it can cause dissatisfaction, low morale, turnover and just poor atmosphere in a firm.

This approach can frequently affect larger owner groups where “partners are equal” even though their contribution clearly is not. It actually damages morale and career development among advisors when the career progression is too “flat.”

Founders of advisory firms that desire to build these “flat organizations” are driven by the desire to be democratic, treat people equally and differentiate themselves from the cultures of banks and brokerage firms. But unfortunately, while the intentions are good, the lack of differentiation in careers, compensation and opportunities can ironically create questions about fairness and foster dissatisfaction among the ranks.

Why Differences Are Important
One of the reasons it’s important for companies to treat people differently is that, again, it ironically fosters a better sense of fairness than if they didn’t. If all people in an organization are treated exactly the same, a time will come when those that perform the best will feel that the system is not fair to them—that they contribute the most but do not receive adequate rewards for it. Great performance might come from somebody’s talent, but it is also the result of effort and passion, and those that apply the most effort usually expect it to be recognized and rewarded. If it isn’t, they feel they are being treated unfairly.

Without that better treatment, staff can’t tell whether they are making progress in their careers. There are no milestones to tell them whether they are any closer to their goals. In fact, they can’t even tell what the goals are. Such an environment tends to discourage rather than encourage. What’s worse is that people start developing their own goals and milestones, often the wrong ones: They want to know who the CEO talks to the most and who was invited to what meeting. These things become unreasonably important.

Finally, some hierarchy, while it does not have to be permanent, helps get things done. There is a reason cars have one wheel and one driver. If every seat had a wheel and pedals, the car would go nowhere. Yet this is what we often create when we build “flat” organizations—groups and committees with no leadership. Even if it’s just at the temporary project level, some hierarchy helps get projects completed faster—and often better.

The differentials can take many forms—in actual hierarchical differences, in diverse forms of compensation, in special employee recognition and even in the pieces of ownership offered. Each of these has its own advantages, but they tend to work better together.

Who Are The Top Performers?
The first mistake organizations make is not making it clear what constitutes a “top performer” and who those top performers are. Firms are often reluctant to acknowledge the top lead advisors for fear of upsetting the others. The result is counterproductive—the ones at the top are frustrated and those who aren’t performing are not inspired anyway.

Ignoring that problem is naïve. It is very clear to everyone that some partners work with more clients than others and some professionals generate more revenue. Some partners train people better. People already know who is different. When bosses don’t acknowledge it, they destroy the sense of fairness and miss the opportunity to define clearly what matters.

That missed opportunity is significant because there may not be a better way to motivate change than by public recognition and praise. In fact, I would propose that if there were a choice between a system that publicly praises the top-performing professionals in a firm for some type of contribution (for example, business development) and another system in which partners are paid for business development but the individual results are kept secret, the firm would likely see better behavior in the first arrangement. Compensation, especially if the results are not known, will only reward what is already happening. As any teenager can tell you, peer pressure is an entirely different force of change.

When you define and measure the top performance, you also create an opportunity to tie it to rewards and promotions (while emphasizing fairness). But even those companies that want to compensate performance have a hard time because they have no history of doing it. They are unsure what metrics to use, and a new system seems scary. Professionals have likely never been scored in those companies or evaluated, and the new compensation could produce surprising, even shocking results or seem arbitrary and perhaps unfair.

If a firm wants to change behavior, I would suggest starting with measuring and reporting individual results. Once those measures are understood, it will be easier and more acceptable to the staff when a company ties those measurements to pay.

Differences In Hierarchy
The flat organizational chart is often a virtue only to the founders of advisory firms. For everyone else, promotions are a goal, a measure of progress and things that give employees a sense of achievement. If there are only two professional positions in a firm—associate and partner, I promise you that associates feel disheartened. They likely feel like marathon runners without mile markers. They may be at mile 10 or mile 15, but either way they have a very long way to go. They might not know they are on the right track or what they are supposed to do next, and those questions can become overwhelming. The partners, junior or senior, will not be much happier either.

“Hierarchy” is not even the right word. The right word is “status.” Everyone has a status in his or her organization whether it’s documented or not. The organization not only tells you “who is the boss of whom” but allows itself to control how people obtain status and steers them toward the right types of behavior. Without an effective hierarchy, status is earned in ways that are perhaps counterproductive or plain wrong—it comes down to who has been here the longest, who works with the largest client, who talks to the CEO, and so on. Ideally, status is earned through performance, and so is compensation.

Differences In Compensation
Compensation gets most of the attention when it comes to rewarding achievement, but I would like to repeat that public recognition is just as important—and perhaps even more effective. Incentive compensation (“bonus”) plans are a well-known way of creating difference and rewarding those that perform the best. A good incentive plan, though, begins with a transparent system of measuring performance. If it’s not publicly known (you get a check but no recognition) and if the results are often not large enough, then the results will be minimal.

This is particularly a problem at the top of the organizational structure. The word “partner” used in many advisory firms tends to signify a certain level of equality with other “partners”—people with similar responsibilities and thus comparable salaries. But their performance is often drastically different.

Imagine that one partner, Philip, manages $1 million in revenue and generates $20,000 to $25,000 in new business each year while another partner, Brandon, manages $1.5 million in revenue and brings $100,000 or more in new revenue each year. Clearly, the two are not even in the same performance category, yet in the compensation system of most RIA firms their base compensation would not be 50% different.

Philip’s salary may be lower than Brandon’s, but it will rarely be “lower enough” to suggest how much Brandon’s performance exceeds Philip’s. Maybe Philip is at $200,000 and Brandon is at $250,000—yet Brandon is possibly adding twice as much to the firm’s profits as Philip is. There may be a bonus system where Brandon will earn more than Philip, but many firms do not have bonuses for partners and even if they do, the potential to earn income is less than the clearly significant difference in contribution.

It appears that the solution may be to create a very significant difference in salaries. But if we pay Brandon $400,000 and Philip $250,000, have we perhaps not gone too far? Can two people be in the same position if their salaries are so different? What’s more, are we not creating silos and damaging the integrity of teamwork?

This is why we need other forms of recognition and reward for achievement. A firm has to celebrate its heroes, not just pay them. Otherwise it may turn its heroes into mercenaries.

Differences In Ownership
Ultimately, if there is such a big difference in performance between two owners, perhaps the best way to recognize it is by creating differences in ownership. If Brandon is so much more productive than Philip, he should be a larger shareholder or owner. Otherwise, the value created in the firm may not be properly allocated in the long term.

This is a logical conclusion, but a very difficult practical matter. Equity is meant to be more permanent and reward those that invested and took risk. If we change equity because of the results from last year, are we not undermining that notion? Will we not undermine the value of equity if we start awarding it based on performance? Some law firms do that, but it is well known that law firms have little, if any, equity value. If we make the top performers bigger owners, are we not creating a concentration of ownership in the hands of a few “superstars”?

Again, the answer is to find balance. If a firm has a way of recognizing and praising its top performers, if there is a sense of “status” tied to performance and if there is a good system for paying for that performance, there will be less pressure on equity to reflect it. Ultimately, though, the top performers should own more. That will only be fair.

How Different is Different Enough?
Employees, in fact, are not children and do not want to be treated as such. They are very capable of managing their own careers, and in fact many of them want to have more control.

What they need is not equal treatment. They need an equal start and access to opportunities. They need clarity in the rules and goals, and then they will be able to take care of their own results. “Flat” is a relative term—the Appalachian Mountains are “flat” next to the Himalayas. “Flatter” may be good, but “too flat” may drive away those that want to climb a peak.

A strong firm culture will have a well-thought-out way of recognizing and celebrating the top achievers. Once that is in place, a firm may build additional levels of differential by awarding promotions and pay. Recognizing the best will ultimately help everyone.

Philip Palaveev is the CEO of the Ensemble Practice LLC. Philip is an industry consultant, author of the book The Ensemble Practice and the lead faculty member for The Ensemble Institute. More information about the institute can be found by e-mailing [email protected].