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What is the best way to compensate staff?

By pranshu in Op-Ed
Fri Mar 16, 2001 at 01:30:41 PM EST
Tags: etc (all tags)

One of the key issues facing companies is how they attract and retain talent. This is a huge issue and there are many aspects to it, some of which can be controlled by the company some of which cannot. This essay looks at the aspect of compensation from the viewpoint of a small (<100 staff) growing company.

Assume the company has 40 staff, primarily programmers and system administrators, is privately owned (no VC), has medium long term debt , is profitable and has no intention of going public.

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comments (24)
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Almost everybody expects to recieve finacial compensation for the work that they do. All else being equal companies who offer better compensation packages have a big advantage in attracting and retaining talented individuals. How does a company reward employees for the work they do and let them share in a company's sucess?


This forms the basis of any compensation package. During the Internet bubble smaller companies surviving out of working capital (as opposed to Venture Capital or IPO funds) were at a disadvantage. They simply could not compete with bigger established firms or heavily funded start-ups. If the payroll is too high it's difficult to find capital to grow the company even if the business has excellent economics. Lately staff in technical or Intenet economy positions have been looking at more realistic and sustainable salaries.

Salaries tend to be fixed amounts. If the company makes large profits it may not feel the need to share these with the staff as they have a salary and do not share the risk. Companies cannot really move salaries downward without it having a big impact on morale.

Precisely because a salary forms the basis of a compensation package is is not something exciting with which people can be tempted. The necessary rarely becomes as coveted as the possible.

How much should a small growing company pay in comparison to the market rate?


In a listed company these should form part of every compensation package. Staff who own part of the company take it more seriously. They tend to work harder, try and keep down costs, and contribute in other ways to make the company a sucess.

The problem with going public is that a company often loses its independance and the ability to change strategy or invest for the long term or simply in the interesting rather than the profitable. The market demands consistent short-term sucess and companies often play a games of fooling their shareholders. Venture Capital companys are even more controlling and demanding.

How many share options should be given?
How long should it take the shares take to vest?
Is there a way to avoid the disadvantages of going public?


This is quite an interesting one. This essentially means the comapny takes a % of the years profits and divides it up amongt the staff according to vairious criteria. This can be done via a formal profit sharing program or via a bonus scheme. Formal profit share schemes can be used as an incentive to attract staff, ad-hoc bonuses are not as enticing. Profit share schemes should motivate the staff but perhaps not as much as share options.

The problem with profit sharing is it takes money out of the company that could be used for growth, it's like compaines paying a dividend. Warren Buffet prefers companies whose shares he owns not to pay dividends if they can profitably reinvest the money. If a company agrees to pay out 50% of it's profits to its staff it may not be able to take opportunities for further growth that that money could have offered. If the staff have shares in a company growing at a rate of 40% this would probably be a far better growth rate for their money than if they took it out of the company. and invbested it elsewhere (like a new car!)

Should a company have a profit share program?
How does a company share profits yet still have money availible for growth?


Voxel dot net
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o Raw Infrastructure


What's the best form of compensation
o A fat salary 29%
o A reasonable salary and share options 2%
o A reasonable salary and a profit share 19%
o A reasonable salary and free lunches 2%
o The comapny should try and hire Cute girls 44%

Votes: 67
Results | Other Polls

Related Links
o Also by pranshu

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What is the best way to compensate staff? | 41 comments (33 topical, 8 editorial, 0 hidden)
Better Managers (4.00 / 2) (#1)
by retinaburn on Fri Mar 16, 2001 at 08:56:11 AM EST

I see a problem with shares as compensation. If the company hits hard times, your staff may sell their shares. Then you are off at square one, your staff don't have a 'share driven reason' to work harder for the company. Some staff may even leave the company in hard times if the stocks take a hit. Perhaps this is just a result of too much work and too little bodies, gives people options they might not have had 10-30 years ago.

How would I reward my staff. Aside from a nominal bonus or share type compensation I would give them genuine praise for job well done. Take the group out to dinner or perhaps get them better management staff...we could all use better management :)

I think that we are a young species that often fucks with things we don't know how to unfuck. -- Tycho

All Three (4.00 / 1) (#2)
by Ratnik on Fri Mar 16, 2001 at 08:56:47 AM EST

The company I work for uses a combination of all three to attract and keep personnel. Of course it doesn't always work out as all of my stock options are basically worthless now. So my company is cuurently using the big salary approach with all new hires.

Money, and lots of it. (5.00 / 4) (#3)
by pwhysall on Fri Mar 16, 2001 at 09:01:29 AM EST

As noted, stock options and shares are frighteningly vulnerable to the vagaries of the NASDAQ and friends.

Personally, I like a big lump of cold hard cash every month. However, do not underestimate the value of a contributory pension scheme; I am in one of these at the moment, and my employer will match my contributions, up to 7% of my income. Which can be regarded as a 7% pay rise that you can't spend right now.
K5 Editors
I'm going to wager that the story keeps getting dumped because it is a steaming pile of badly formatted fool-meme.

Stock options (4.00 / 1) (#4)
by forgey on Fri Mar 16, 2001 at 09:02:10 AM EST

While stock options are great if the company is either solid, or poised for a good IPO what I would much rather is a stock purchase plan where employees can buy stock anytime at a discounted price.


One thing I've noticed... (4.50 / 4) (#5)
by theboz on Fri Mar 16, 2001 at 09:02:23 AM EST

It doesn't cost much to do little things for your employees. Really, if you can pay an ok salary, but you go out of your way to show your employees that they are appreciated you don't have to give them a raise.

Some things to do are to have approachable management, free meals, regular team and company outings (movies, ballgames, etc.), a bit of time to goof off at work, and give them a sense of pride in the company. Really, giving your people the chance to see a movie for free (tickets are about $7 per person) will keep them from looking for another job with a higher salary. Rather than giving them a raise, that might cost $10 an hour, you pay $7 a month and it keeps the employees happy. If you can keep the work environment positive and fun people will be less likely to find out about salaries other companies pay.

Now, with all that being said, I don't think companies should rip off their employees. I just think there are other ways to get them to be happy and work hard than throwing money at them.


company outings/social events no fun (4.00 / 1) (#11)
by yankeehack on Fri Mar 16, 2001 at 11:02:31 AM EST

A personal observation about company outings, since they can cause unforseen problems.

My husband frequently has dinners, picinics and the like with his co workers--most are during regular work hours. While this might sound ideal (especially for those of you who don't have families to worry about). This is a problem for employees with families. Especially for events that occur outside of work hours and without family. (i.e. lets go to the local watering hole.) I know that my husband feels that he should go to these informal events, especially that his management kind of lends their approval to these goings on, but he has responsibilities at home too.

Do you see the conflict here? Note to management: don't make your employees choose.

No one who was bad in bed has ever been good in life (i.e. liberals, I've never had sex with a liberal woman who knew how to use her body.) Keeteel :-P I'm *right*!
[ Parent ]

I was thinking more during work hours... (none / 0) (#15)
by theboz on Fri Mar 16, 2001 at 11:33:39 AM EST

In the company I work for they do a little of both, but the majority of things tend to be during work hours. The other things there isn't any pressure to attend the after work activities, so it's no big deal. However, (as you bolded in your post) the without family after hours thing is a bad idea. Most companies don't do that as far as I know. Perhaps it is more of a thing where the guys just want to get together, much as your husband would with his friends otherwise. Just as long as it doesn't happen on too regular of a basis I would think it was ok. I dunno.

[ Parent ]

Pressure... (5.00 / 3) (#21)
by ucblockhead on Fri Mar 16, 2001 at 12:38:16 PM EST

The trouble isn't necessarily overt pressure to attend. If you are constantly missing group activities it is natural to fall out of the group when forced between dealing with home life and work life. This is especially difficult in a company where most of the people are single. It is very easy for the married people to start to feel like an outsider.

One former company I worked at did more harm than good with their christmas parties, which were employee only. No spouses, significant others. Well, damned if I'm going to go drinking late into the evening leaving my wife at home... Rather than feeling it to be a perq, it just pissed me off.

That said, one or two a year after hours events are fine.

This is k5. We're all tools - duxup
[ Parent ]

Balance (none / 0) (#35)
by jasonab on Sat Mar 17, 2001 at 02:43:42 PM EST

While I understand what you are saying, coming from the other side, I think it's important for even those with families to attend those events at times. I don't expect that person there every week, but I like it when I get a chance to talk to people at those events. Those who never show up because of family reasons hurt themselves and the group.

America is a great country. One of the freest in the world. -- greenrd
[ Parent ]
What Mice Tell us about Reward... (4.62 / 8) (#7)
by gauntlet on Fri Mar 16, 2001 at 09:37:27 AM EST

My wife took a psychology class last year and related an interesting story to me. Evidently, they had a setup with a lever that a mouse could push, and a reward (food, presumably) would come out, once per hour. Before long, the mouse was pushing the lever once an hour to get the reward, and just hanging out the rest of the time.

The second mouse was given the same deal, except the rewards became available at more random times which averaged out to once an hour. Because the mouse couldn't reliably predict when the reward was available and when it wasn't, the mouse was constantly on the lever.

So if you want to entice employees to work harder, reward them with bonuses, but at random times of the year.

Into Canadian Politics?

hopefully your employees aren't mice (4.33 / 3) (#8)
by jayfoo2 on Fri Mar 16, 2001 at 10:10:12 AM EST

Actually I'll disagree pretty strongly with applying that to employees. For three reasons.

1. cause and effect

Bonuses work best when they are tied to specific goals. You want to use bonuses to motivate your employees to do things that meet one or more of those goals. By giving bonuses at random times (i.e. when an action occurs) you set up a system where employees don't know if they will get a bonus. This may have them working harder to get more bonuses, but they don't know if their actions will earn them the reward.

What will happen is that employees will get angry when they do something they deem bonus-worthy and are not rewarded. Or when they are not rewarded for something that they previously had been.

Also employees will tend to figure out the activites that are rewarded and do those as much as possible. This is great if you can map those specific activites to profitability (i.e. tailors doing piecework) but hard in an environment (such as tech) where employees need to wear many hats.

2. Jealousy and favoritism.

Since you probably won't reward everyone the same (some people are better employees) you set up a system where employees feel they are competing for rewards.

This is also fine in some situations (i.e. sales). But in environments where teamwork is necessary it is not desireable.

All in all I'd recommend a system where bonuses are regular, and the factors that influence the size of the bonus are well understood and measurable.

Also lots of free lunches.

[ Parent ]
Rebuttal (none / 0) (#41)
by gauntlet on Tue Mar 20, 2001 at 06:59:13 PM EST

Your #1 argument seems to assume that the person is rewarded for a random acheivement. In actuality, the idea is to reward the person for more than what they have actually accomplished, but less often than their accomplishments come along. Or, reward them less than what they have "earned", but reward them more often than they would expect. It all evens out in the end.

The argument that they will figure out what gets rewarded is valid only if the rewards are being given more often in response to specific actions. But that's the point: They are given randomly. There is no particular achievement that results in reward, only a continued effort.

With regards to #2, if competition between employees is not something that you want to promote, then you would have to make it clear somehow that people are not competing for these bonuses. Perhaps by occasionally giving small bonuses to everyone. Of course, if you're just talking about teams, then give equal bonuses to everyone in the team.

All in all I'd recommend a system where bonuses are regular, and the factors that influence the size of the bonus are well understood and measurable.
This is exactly what the experiment teaches us not to do. The fact is that if people know what gives them a bonus, and when, and how often, they will do the absolute minimum required to obtain the bonus. Eventually, the mouse will hit the lever only once an hour, every hour.

But who can argue with free lunches?

Into Canadian Politics?
[ Parent ]

Need Rewards (5.00 / 1) (#9)
by tnt on Fri Mar 16, 2001 at 10:30:55 AM EST

I think that the employees should definitely profit, when a company profits.

Just look at it from the employee's point of view.... Why should they work harder (regardless of whether their company does better or not),... what do they get out of it. If they work harder, [the company makes more money but] they don't get anything out of it [except making themselves more tired and more stressed]. Also, the harder they work, the more likely they are to get rid of a job(s) that someone else could be doing. Thus (from the employee's point of view), they should not work harder because: (1) it will increase their stress and make themselves more tired, and (2) because it will hurt their fellow employees (... both existing and potential...) if they work harder (by reducing the number of employees needed to do the job).

However, if an employee got a piece of the profit, then they'd have reason to work harder. Also, if an employees got rewarded with time off, then they'd have reason to work harder also... meaning, if they finished a project early, it would be nice if the employee could have the rest of the [free] time (which was given to work on the project) as a little vacation,... instead of being given a new project.

     Charles Iliya Krempeaux, B.Sc.
  Kuro5hin user #279

Girls girls girls (1.00 / 5) (#10)
by _cbj on Fri Mar 16, 2001 at 10:50:09 AM EST

That needn't be a joke. A lot of companies use whores to entice new staff, and there was that boys football team who were rewarded with sex with the manager's wife a couple of years ago.

Does anyone not like sex with pretty girls? It's probably the coolest thing invented. I'm sure even most girls could be tempted, in the right setting (or just get male ones if they're resolutely dull about it). And I've done the sums -- a good whore will set you back a couple of hundred quid. That's a lot compared to a trip to the cinema or lunch, but piss to a company used to awarding 5K bonuses.

re: girls (2.50 / 2) (#14)
by wiredog on Fri Mar 16, 2001 at 11:20:59 AM EST

Does anyone not like sex with pretty girls?

Two groups I can think of:
People, such as myself, who prefer women.
Strait women.

The idea of a global village is wrong, it's more like a gazillion pub bars.
[ Parent ]

WOMEN maybe (1.00 / 1) (#18)
by 2400n81 on Fri Mar 16, 2001 at 12:08:24 PM EST

Does anyone not like sex with pretty girls? It's probably the coolest thing invented.

do you mean women?

[ Parent ]

Women women women (none / 0) (#29)
by _cbj on Fri Mar 16, 2001 at 01:27:40 PM EST

Yeah, sure, whatever. In my culture they're synonymous.

Relax, user.

[ Parent ]

Credit. (4.66 / 3) (#13)
by Farq Q. Fenderson on Fri Mar 16, 2001 at 11:19:37 AM EST

Credit, I find, is one of the few things that employees rarely get. When doing research, or creating brilliant things, the credit tends to go to the company as an entity.

Personally, if I ever hold back for a company, it's because they're not paying me enough to hand over the credit for something I take pride in having done. It's a sellout index, really.

I'd be motivated to showoff, even, if I would get credit for my results. I'd be motivated not to mess up, if I had to take credit. So there you are.

Another effect of this is endearment of the product. If an employee gets renown for doing something, then the next thing that employee does is going to be something to look for. It much easier to gain sincere respect as a person than as a 'legal entity' - but if a company holds a respected individual, then that company may gain respect as well. It's psychology.

farq will not be coming back
and the best type of credit is... (5.00 / 2) (#26)
by cbatt on Fri Mar 16, 2001 at 12:56:40 PM EST


Scads of cash.

I don't care how much verbal credit I get within the organization for being the best. I want them to put their money where their mouth is. Talk is cheap, show me the money.

If somebody is getting rich off of my work, and I'm not seeing a dime. I don't care if they tell me that I'm God (if you blieve it exists... blah blah blah), if there's no money there, it's just so much bullshit and I'm a sucker for lapping it up.

Before you can understand recursion
you must understand recursion.

[ Parent ]

Supplemental... (none / 0) (#28)
by Farq Q. Fenderson on Fri Mar 16, 2001 at 01:27:16 PM EST

Well, chaque a son gout, but I meant supplementally to any other benefits.

Few are likely to work for the renown alone. I probably should have stated this explicitly.

farq will not be coming back
[ Parent ]
fringe benefits: company pr0n database (2.00 / 2) (#16)
by 2400n81 on Fri Mar 16, 2001 at 11:48:26 AM EST

here is what ya gotta do, hear me out.

most guys like iPr0n so why not maintain a nice "unofficial" anonymized freenet-esque server for their personal usage so that the proxy and outbound connections are not overloaded and the company name isn't tracked on pr0n sites. yah, lame but what guy has ever said "i just have too much pr0n!" it's like saying "i have too much beer and way too much money!"

as an IT admin i am constantly finding pr0n traffic even though we have a draconian anti-sexual harassment and anti-pr0n policy. the employees have learned to clear their caches and stuff so it is a lot more difficult to catch them. we also have DHCP instead of static IPs.

A bill-handling service (2.00 / 1) (#17)
by weirdling on Fri Mar 16, 2001 at 12:05:03 PM EST

I'm not kidding; the company receives my bills, deducts the amount from my paycheck, and pays the bills. Such a service would make me very happy.

I'm not doing this again; last time no one believed it.
Tax structring (none / 0) (#22)
by pranshu on Fri Mar 16, 2001 at 12:43:05 PM EST

I think most inland revenues would catch this. I would agree that anything a company can do to reduce employee's tax should be looked at.

[ Parent ]
Privacy issues (5.00 / 1) (#25)
by Knile87 on Fri Mar 16, 2001 at 12:55:35 PM EST

All your bills? Hmm.. Don't you feel like your privacy is being if not totally breached, perhaps just a little infringed upon? Your company can know your water/electricity usage habits, your phone calls, whether or not you get HBO... Convenience comes at a price, folks.

"We're all on a big ship! We're on a big cruise, across the world!" -- Iowa Bob, in Hotel New Hampshire

[ Parent ]
The dangers of stock options (none / 0) (#20)
by wiredog on Fri Mar 16, 2001 at 12:38:12 PM EST

They're taxable. From the Washington Post article Some Shocked At Tax Bills On Options
"But a growing number of workers now find that they owe the government for stock that didn't earn them a cent, and perhaps never will."

The idea of a global village is wrong, it's more like a gazillion pub bars.

It's the little things that count. (4.25 / 4) (#23)
by ucblockhead on Fri Mar 16, 2001 at 12:45:04 PM EST

The best ways to keep people happy are often the cheapest, and often ignored. Little things like not giving people shit if they have to take off for a half-hour doctor appointment, or allowing people control over how their workspace looks, are listening to people when they suggest how their job could be made easier. I'm constantly amazed how many companies find it so hard to do that, and thereby hurt employee morale. I've seen people quit because a company was too damn cheap to by a bicycle rack.

That, and just realizing that the staff isn't stupid. At one company I was at, an entire department was laid off "for business reasons". Later that year, people were told that there would be no raises in the IS department for a year. Half the IS department resigned over the course of the next year. Management expressed surprise about the "lack of employee loyalty". Well, duh... If you aren't loyal to your employees, they aren't going to be loyal to you. Lay people off "for business reasons" and they'll be perfectly comfortable going to the competition "for business reasons".
This is k5. We're all tools - duxup

Little things like flexibility! (4.00 / 2) (#34)
by jasonab on Sat Mar 17, 2001 at 02:35:43 PM EST

The best ways to keep people happy are often the cheapest, and often ignored. Little things like not giving people shit if they have to take off for a half-hour doctor appointment, or allowing people control over how their workspace looks, are listening to people when they suggest how their job could be made easier.
Let me agree, and amplify with my current situation. Just before I started with my current employer, I was invited on a trip to South America. My employer agreed to let me take the time off, even thought I would only be at work for about six weeks before I left. The trip burned all my vacation for the year, but I was told that the company would be flexible in more vacation.

So, the time comes and I want to head to KC to watch the US Soccer team play. So, I asked for a couple of days off. I was told that since I was on a time-intensive project (with a few weekends this month), that I could have that time for free. That's reassuring.

America is a great country. One of the freest in the world. -- greenrd
[ Parent ]

kinds of corporations (none / 0) (#30)
by jkominek on Fri Mar 16, 2001 at 01:29:32 PM EST

I'm strange. I pay attention in my classes. I recall, quite distinctly, from my high school economics class, that there are many kinds of corporations. There are two ones of interest at the moment, however. Private corporations, and public corporations.

Corporations start out their lives as private for-profit corporations. Then they can try to become non-profit if appropriate, or they can do SEC and exchange filings and become public corporations. But a corporation doesn't have to do that! They can just stay a private corporation.

What relevence does this have?

Private corporations have stock and a board of directors as well.

If I'm an employee in a private corporation, and I'm given some stock in the company for my work, I'm going to be a hell of a lot more interested in it than if I get stock at a public corporation. Sure I can't sell it through my stock broker, but I can sell it to anyone I please (no SEC restrictions! woohoo!), and it does give me votes for the board of directors... Thus giving the employees a voice as to who is on the board. Maybe not much of one if a controlling majority isn't distributed amongst the employees.
A company would really attract my attention when hiring by telling me that they gave the employees a controlling interest in the (private) corporation. (I believe that there was a Raytheon spin off run this way. It did quite well, iirc, until somebody just bought up all the employees' stock during the recession around '90.)
- jay kominek unix is all about covering up the fact that you can't type.

Private vs Public stock (1.00 / 1) (#33)
by malikcoates on Sat Mar 17, 2001 at 11:08:02 AM EST

The problem with private stock is that it is not easy to liquidate.

Stock has no real value, it just worth whatever you can sell it for. Private companies have accountants look over the books and say ... ok each share of your stock is now worth X dollars. The whole problem with that is that nobody is going to buy at X just because a few accountants said so. When you actually need that money it'll be very hard to get anybody to buy it unless you offer it at some fraction of X.

With a public company, you can actually sell the stock at or near the stated value. You can do it in minutes on an open market instead of spending weeks trying to find a buyer for your private shares.

[ Parent ]

Optioned stock (none / 0) (#36)
by Miniluv on Sun Mar 18, 2001 at 01:59:25 AM EST

Actually, many stock options are not instantly convertible on the open market. Usually this is because employee stock is issued as preferred, or class A, stock and the rest is class b or public stock. The company typically wants to retain control over preferred stock, as it often confers extra benefits, such as a 2 to 1 voting ratio at board meetings and such.

Being a person with a decent quantity of stock options, I honestly would prefer some other form of compensation. Stock options were given because we're operating out of venture capital, and thus stock options are a cheap, virtually free in fact, way to boost my comp package without any real difficulty.

"Its like someone opened my mouth and stuck a fistful of herbs in it." - Tamio Kageyama, Iron Chef 'Battle Eggplant'
[ Parent ]

Relief (2.00 / 1) (#38)
by CaptainBoom on Mon Mar 19, 2001 at 02:15:35 PM EST

I recommended on Call Tension relief. This can take any number of forms my favorite method involves Swedish Backrubs with the option for more. Of course Hot tubs in your cubicle would be nice. Furthermore Pay raises across the Board. As well Random and violent executions of management staff and assistants. Only regular employees would be immune from such retribution.

Very Dilbertesque (none / 0) (#39)
by codepoet on Mon Mar 19, 2001 at 02:48:10 PM EST

How very Dilbertesque. Should there be a manical trio of animals to run the company afterwards? Perhaps a fourth to impose mandatory adherance to the green line in Word, which you so obviously ignored several times to make that comment? =)

Seriously, though, while backrubs and mass executions would be entertaining, there ain't nothing like a wad of greenbacks in my pocket. Give the employee a large amount of money and the employee will buy anything else that he feels is needed.

-- The cynical can often see the sinister aspect of a cup of coffee if given enough time.
[ Parent ]

Little Green Line (1.00 / 1) (#40)
by CaptainBoom on Mon Mar 19, 2001 at 03:06:44 PM EST

For your information there is ony one little green line. That is under the word raises. Want a screen shot tuft??

[ Parent ]
What is the best way to compensate staff? | 41 comments (33 topical, 8 editorial, 0 hidden)
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