1. They must be fair and be seen as fair.
  2. They must be managed and applied with integrity and dispassion.
  3. See ## 1 & 2.

By “fair,” we don’t imagine the ur-ideal of justice where no one whatsoever could take issue with the outcome; but we do mean that over time and on the whole, people pretty much have to admit they’re fair. A few % ± one way or the other this year or that is understandable; we’re all human. We’re not talking about differences of 1.00X vs. 0.98 or 1.03X. But over the long run people have to be ready to honestly confess that if Alpha took home 2X or 0.5X what Baker took home, they understand why and agree that it was, in the larger scheme of things, fair.

By managed with integrity, we simply mean the compensation system has to actually produce the numeric outcomes it was designed to do with nobody’s thumb on the scales and with no perceptible whiff of favoritism, in-crowd/out-crowd, special dealing or special pleading. If you tell me the system is purely formulaic, plugging in the numbers and producing the function’s calculated result, then for heaven’s sake stick to it. No do-over’s.

If on the other hand your system embeds a large subjective component—good citizenship, firm-first behavior patterns, volunteering for administrative matters, mentoring associates, cultivating the firm’s profile in the community, etc.—then managing it with integrity has different components but they need to be executed with no less rigor, conscientiousness, and force:

  • Consult widely with colleagues about the individual’s performance and behavior on these measures; be thorough.
  • Take into account year to year or periodic spikes and swoons that don’t constitute precursors of a long-term trend. (How do you know it’s “long-term?” When they cease being spikes and swoons and become patterns.)
  • Most importantly, there’s a direct correlation between how much of the compensation determination depends on subjective judgments and communication about what those judgments are evaluating and how they’re made.

The last point has particular teeth. Formulas don’t require much explanation: Have wallet cards printed if you like, and call it a day. Subjective systems demand the hard work, devotion of time, and one-on-one meetings throughout the firm to consistently communicate what behaviors are rewarded and penalized, who makes those assessments, and how. The aim is obviously maximal transparency, understanding that the moment you opt for including almost any subjective ingredient you have introduced a bit of opacity.

But back to the fallacious belief that managing compensation takes you a long way towards managing everything at the firm, period. Type A’s require more than money to feel included, valuable, inspired, and challenged.

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