A client told me this story—how someone at her firm mistakenly e-mailed the compensation census for the entire company to all of her employees. Within an hour, every staff member was looking at how much everyone had made in the last year, bonuses included. She said that two employees quit the same day, and she spent the rest of the year dealing with the aftermath of that one e-mail.

I call this the “refrigerator test.” What would happen if you were to post everyone’s compensation on the office fridge? Would you face a revolution or would everyone shrug and look for their yogurt? In my mind, while excessive disclosure of compensation is somewhat distasteful, in a healthy company, if you were to make that post, there should be no surprises and no conversations you would fear having.

I am not advocating open-book management, but rather suggesting that you should have nothing to hide. Because if you do, the compensation chickens always come back to roost and the eggs they lay are quite rotten.

Compensation Philosophy

First of all, no firm ever sets compensation by saying “we want to be unfair, unreasonable, cheap and create chaos.” The road to hell is truly paved with good intentions, as they say. Firms start out by looking to be fair but then get tangled up in the circumstances. We hired Ed away from another firm, so we had to pay him more to make him leave. Judy turned down health insurance, so we promised to give her a bit more salary (a frequent and possibly illegal practice). Adam has been with us for 20 years, but he has not been promoted in 10. All these circumstances add up to a labyrinth of decisions that can easily go astray, and they usually do.

The best, and perhaps only, place to begin is for every firm to very openly formulate what its compensation philosophy is. How are compensation decisions made? A good philosophy will state who makes the decisions, what factors are considered, what data is used and how often this evaluation is performed. Business owners should consider the market for the position they’re hiring and the various skills and characteristics of each team member. A good system will always start with the market, but will not end there.

Compensation Is Not Actuarial Science

There is a very strong temptation among managers and business owners to treat compensation as some form of actuarial science. Many owners believe that somewhere in a vault there is this “Magic Book Of Compensation” where you can look up the exact number for each and every person, if only you could enter all the variables—their experience, education, credentials, work-ethic score and so on. The reality of compensation decisions is quite different and much less precise.

Perfect compensation information does not exist and cannot conceivably exist. Even with the emergence of outstanding compensation surveys and a variety of transparency tools such as Glassdoor, we still can’t perfectly measure the market. Simply put, each person is different, and many of the factors that influence their compensation cannot be captured by surveys or are only available after the fact.

Compensation surveys are very useful in measuring the market, but they can suggest only a range of values that are acceptable and not one that’s specific and perfect. I frequently experience this with our next-generation leaders—when we show future managers and leaders of advisory firms information suggesting that someone is paid less than the average for the industry, many of our G2 leaders immediately react that the person is underpaid. When we show them information that a person is paid $10,000 more than the average, many tend to declare the person overpaid.

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