The Surveys Say...
Labor market surveys, statistical analyses of trends and supply rates from educational or training institutions can be helpful in making well-considered business judgments regarding offers, merit increase budgets, service/product pricing, etc.

The danger in using these quasi-scientific methods of viewing compensation is that the human part is often ignored. When we enter a discussion or study of compensation, we are in a realm of human psychology. Individual and group behavioral principles have more to do with the subject of compensation than the numbers alone.

Motivational Factors
For example, we have all heard the results of repeated studies showing that employees are more motivated towards long-term behavior trends with the non-monetary aspects of their jobs, i.e., recognition, nature of the work itself, relationships with colleagues and leaders, etc. These factors play an important role in determining what a company pays for its talent.

When I discuss compensation issues with candidates for a position, I ask them what they would demand to work in "hell" and what they would accept to work in "heaven." Everyone chuckles and knows exactly what I am talking about.

The company that offers the kind of workplace where people are respected and involved equals, doing quality work as a team, typically has a lower overall cost of compensation when measured against likely peer organizations who do not offer the same kind of environment. The "cost" of compensation includes not just base salaries and fringe benefits, but also the cost of lost productivity, absenteeism, turnover, and even lost ideas.

In addition to these well-understood aspects of compensation and human psychology there are other factors which can and do play a significant role in how organizations apply compensation theory. Over the years, I have seen the following myths cloud management judgment. These are based upon frequent comments I hear from business leaders when we discuss compensation.

1. "You can keep compensation information confidential."

Certainly the effort is appropriate, in the interests of protecting employee privacy and proprietary company information, but all too often managers think that they will not have to worry about perceptions of fairness if they simply keep the information from getting out. Some managers even think they can order employees not to discuss compensation.

2. "People do not generally appreciate or understand the business reasons around compensation decisions."

We live in a consumer economy, based upon a generally free market system. We are taught from an early age the process of buying and selling, of profit and loss, risk and reward. Everyone has varying levels of appetite for the game, of course, but by the time we are in our early adult years, the game itself is not hard to fathom.

I have found few people who do not immediately grasp the business decisions surrounding labor dollars, when they are included in the discussion of compensation. And when people are treated as if they could not possibly comprehend the issues, (i.e., when they are being treated as children), they will behave accordingly -- petulant, resistive, rebellious, and sullen.

If you go through the decision process with your staff, two things will happen. First, they will participate in the process of establishing market-driven compensation policies that will increase your company's ability to favorably compete in the business you are in, and will understand more about how businesses are successfully run. Second, they will participate in decisions that affect their own lives, which increases self-satisfaction and diminishes the plague of victimization that grips so many people, bleeding energy and productivity out of organizations.

3. "Ownership opportunities should be reserved for people who can really impact our long-term future and who appreciate the value of equity."

How long can a company exist without its president? Several months? A year or more? How long can a company exist without its janitor? I knew of a 200-person organization that literally came to a standstill in one day, when the janitor unexpectedly quit and left no toilet paper.

If there is an employee in the company who does not impact the long-term viability of the organization, then I would argue that the position is superfluous. If people do not understand the value of ownership, why do most of us in this country either own a home or would like to? Certainly there are people who cannot afford to take a cut in cash pay in order to invest in stock options. They are simply not able to allocate their limited funds on such a risk. But I have found that given the ability to invest, most people recognize that ownership is the key to financial independence. What would be the impact of having an organization where all of the employees had a real stake in the business? A concern of some business owners is "dilution", (i.e., owning decreasing percentages of a company as time goes on, because there are more and more people who have shares).

If that dilution is accompanied by an increase in the absolute value of the organization beyond the rate of dilution, then the dilution by itself is not a bad thing. It is a good thing. I can tell you that in my own company, where each year I own less and less through a stock purchase plan for employees, we have experienced an average of 55 percent growth per year over the life of our firm.

My stock today is worth approximately 3500 percent more than when I founded the company eight years ago. I know that sharing ownership has been an absolutely critical part of that growth in value.

Many studies have shown that 90 percent of stock options are sold at the time they are purchased upon vesting. This has been used as an argument against awarding stock options to all employees.

With election periods normally set at ten years, most people do not spend the money to buy the shares until they know they are going to cash out, so it is a foregone conclusion. Why buy the stock when I do not have to yet, and can still receive the appreciated value of the shares? (The capital gains advantage of early purchase and holding for the prescribed time period is less of an issue with staff than with senior management.) And when I do buy, why not realize my profit? Is profit-taking a bad thing? Presumably every shareholder in the company should have the same idea.

Beyond The Open Book
A lot has been written and said about the subject of open-book management, which simply means sharing information with employees about how the company is run, how it is doing and where it is going. Certainly this is an increasingly popular trend, for good reason.

People in such organizations tend to think in more realistic terms, feel involved in the business and therefore trusted, and make better decisions about how they work and expend resources. And there is no more important information in a business than compensation practices, in terms of how it affects the trust that employees feel towards the leaders of the organization.

The sensitive nature of the subject is evident whenever I talk to managers, owners and board members about whether or not to include people in more and more of the process. It is hard to give up perceived control, and therein lies the paradox. The more a business leader involves people in the subject of compensation, the less control is needed in order to achieve the same or greater goals. If an open book is the cultural "text" of an organization, participation in control is the "lab practicum".

So having a participatory organization and including people in the financial information of the company, is the first part of creating an organization full of people with owners' attitudes. But keeping compensation practices behind a veiled curtain conflicts with the participatory philosophy. It sends a double message. Compensation is where the open- book culture meets the road.