I have never worked with a firm that sets out to create an unfair compensation plan. Yet in my consulting work, I constantly hear employees and even owners say, “My compensation is unfair!”

Each of us seems to know instinctively what is fair, but our strong opinions often collide. We believe we know fairness when we see it, yet we often disagree what is fair in a given situation.

I read somewhere this anecdote where a teacher was trying to explain the concepts of good and bad to a child. He tested the child’s knowledge, and the child said confidently: “Bad is when someone takes my toy… and good is … when I take someone’s toy.”

Is it perhaps that our versions of fairness are more selfish than we think, or are we perhaps bouncing among too many different frameworks when we’re making our evaluations?

Actually, all these things can be true at the same time. Which means the creation of a fair compensation system will require you as a business owner to answer some very difficult questions. At the same time, you’ll have to confront ever-changing codes of ethics and morals. In fact, you’ll possibly face multiple and unclear moral codes—one within your firm, one in our society and, finally, the ones held by each person you employ.

What Is Fair?
Most businesses strive to be meritocracies, places where those who contribute the most benefit the most. It seems like a straightforward idea, yet it requires every firm to very carefully articulate what it means by “contribution,” which is not so straightforward. More important, for a meritocracy to work, it must establish an “exchange rate” for these contributions. What’s more valuable to you—business development or operations management? How much more valuable is someone who brings in $100 million in new assets than someone who lays down a compliance process? This is where the tires of the meritocracy truck meet the road.

Note that for a meritocracy to work, we must make clear judgment calls, and our decisions have to be both transparent and accepted by our team members. We have to say out loud that “Activity A” is more valuable than “Activity B.” Most businesses are deathly afraid of that. It’s unthinkable to many CEOs that they would have to stand in front of their teams and admit business development is more valuable than operations. Yet keep in mind their compensation system already says this, and so everyone knows it. By not admitting it, the leadership creates cognitive dissonance—which eventually produces unhappiness.

Let’s also take the idea of free markets into account. The markets operate based on demand and supply, which is not the same as meritocracy. Football is a good example of that discrepancy. On just about any NFL team, the highest paid player is the quarterback, even though on most teams he’s not the best player. That’s because quarterbacks are scarce. Kickers aren’t.

This likely frustrates our notions about equality. Human beings judge their well-being and success by looking around and determining their relative status (rather than their absolute status). In other words, as they say in Bulgaria, “Success is doing a bit better than your neighbor.” The desire to be equal may be deeply programmed in our nature. After all, there are well-documented experiments showing that chimpanzees and dogs revolt when two animals from the same group are given different food. Even they want to be equal. (There’s a hilarious and very instructive video on the topic; you can find it on YouTube by searching for “monkey fairness study.”)

If you think we’re better than monkeys, think again. I have worked with many advisors earning more than $1 million a year who sulked when their partner made $2 million. Consider this apropos joke: A genie offers to grant an advisor a single wish, and says “Whatever you wish for, your partner will get twice that.” The guy thinks a bit and says: “I want to lose half my money.”

Or consider an experiment from game theory called “the dictator game.” One person (the dictator) is given, say, $10 and has to share some of the money with the other participant in the experiment. The dictator can choose to keep all the money or share just some. But if the other person rejects the deal, they both lose the money. If he or she accepts, they both keep it. Rationally, the second player should keep whatever is offered (even $1 is better than zero). But as you might guess, the second player often rejects these “bad offers” if they’re unequal.

A fun experiment, but it brings to light stark differences among those of different genders, societies, generations and even political views. We are all universally drawn to equality.

So we should not confuse it for meritocracy, which is far from the same thing. The latter is going to open the door to unequal, perhaps very unequal, outcomes. It’s the reason a company’s CEO might make eight times more than the receptionist (a fact, according to the advisory industry studies we conduct at our firm).

Meritocracy has been challenged as an approach at the social level—by those who say it leads to unfair outcomes, and a poor social outcome overall. The executive ranks in our industry dismiss those complaints, but trust me, our young colleagues hear them loud and clear.

The young aren’t the only ones. There are others among us who also challenge meritocracy on past standards of fairness—in systems where “paying your dues” and “burning the midnight oil” or “being here the longest” are the grounds for a reward, not the results of someone who created something new and better.

So with these problems in mind, it’s time to answer some very complicated questions.

Who Should Be The Highest Paid Person In Our Firm?
A simple question, but I bet most CEOs in our industry would be horrified to answer it in front of their teams. Should it be our best business developer? Should it be our leader, the CEO? Should it be the advisor who manages the most revenue? Should it be the hardest working employee?

Answering this question forces firms to assign value to each function. But our answers could be disheartening to many, so we prefer not to speak about it openly, even though, at the end of day, a decision still has to be made.

The question was simpler when the firms were smaller and the biggest roles were all to be found within the same person—the founder, who was also the CEO, the best business developer and the advisor with the most clients. In modern firms, however, the CEO may have just joined the firm. The best business developer, who is specializing in sales, likely doesn’t actually work with many clients. The advisor with the most clients might not even be an owner in the firm.

I once worked with a firm full of amazingly smart people who had MBAs from Stanford and Harvard. They designed a complex system of keeping track of people’s time, trying to analytically establish which activity added the most value to the firm. Turns out the most valuable activity was entering your time in the time-tracking system.

So you see, this isn’t an easy question.

Can You Separate Profit From Compensation?
In theory, compensation and income are two different concepts. I have spent my entire career trying to convince advisors that an owner in a practice receives compensation for their work but profit from their ownership. That’s why someone who owns a majority stake in the firm will receive the most profits but should not necessarily have the highest salary. For example, Steve Ballmer and Bill Gates are the two largest individual shareholders of Microsoft, but neither has drawn a salary there in many years.

People seem to have a hard time believing me, though, and everyone still mixes up the concepts. They’re still frustrated about the reasons why, say, Jeff makes more money than David, even when Jeff barely comes to the office and David works like a mule. It’s that Jeff has 60% ownership of the firm, being the founder, and the firm is very profitable. David has the biggest job, so he likely has a bigger salary. But profits outweigh salary, which is why Jeff makes more.

This might seem fair, if not logical. The mental accounting of ownership is not very logical.

Who Owns This?
We feel a strong connection to things we’ve created, whether we’re children with cube towers or business owners. “Creator” in many minds means “owner.”

But what if someone else has substantially modified our creation? What if they have competing claims? That happens often in our industry.

If those rival claims come up, the equity tends to favor history—those who came first have invested the most. Equity rewards taking risk. Note that these are not necessarily claims to merit.

I’ve encountered advisors who are either unwilling to purchase equity or have purchased very little, yet they believe they should earn more of the profits because they do the most work and have the most clients. Again, for meritocracy to fully function, everyone needs to understand and accept what merit looks like. Many firms would rather not say it, but if you choose not to take risk with your own money you will be restricted to what you earn only from compensation. And right now, that’s not where the money is.

Bonuses In A Bad Year
One of the more difficult merit questions in our industry is what to do with bonuses in a recession year. It’s during these times firms have the least money to spare for compensation (in fact, they may be running out). On the other hand, the employees might be working their hardest in those periods of tumult. Do we pay bonuses for effort or for result? Do we pay for individual results or for team results? Should we do both?

Perhaps we could balance the result by splitting the bonus for individuals and teams. But those formulas could get complicated, confusing the participants. (In my experience, if employees can reproduce the bonus plan on a napkin, it won’t function well. There’s also the “one tab rule,” which says that if the bonus calculation is on a spreadsheet with more than one tab, it also won’t work well.)

Fundamentally, it comes down to who bears the risk of the markets. Is it the owners who benefit the most from the good years or the entire team? For an outcome to be fair, does it need to be symmetrical? In other words, should we risk to lose as much as we stand to gain?

Is No Bonus A Punishment?
I was recently discussing this question with a client, and he asked: “Why should my employees suffer if the firm is not profitable?” This was an interesting question.

Is that really suffering? Is dessert a treat, or is it part of dinner?

Most firms insist that bonuses are not an entitlement, yet bonuses taken away are thought of as a “punishment.” That, again, is cognitive dissonance.

Who Decides What’s Fair?
Note that fairness stems from the culture of a firm; it’s not a feature of strategy or a compensation method. Being fair means, in part, convincing people we’re fair. Just explaining it is not enough if it does not “sink in” and if people don’t understand it the same way 3-year-olds do when they play with cubes or the way chimps do when they divide food. Fairness is instinctive and intrinsic—the toughest part of our psyche to reach with management memos.

I have never written an article with so many question marks in my entire career. This is because when it comes to fairness, asking the questions out loud is half the battle. The other half is leadership speaking the answers out loud. Nothing else is fair.

Philip Palaveev is the CEO of The Ensemble Practice, the leading business consultants to the financial advisory industry, and founder of the G2 Leadership Institute, a leadership program that trains the next generation of leaders.