Despair Inc.™: Get More from Your Compensation Plan

My name is Lawrence Kersten, and I'm the Co-Founder and COO of Despair, Inc. And today I'd like to talk to you about developing a compensation plan. You know, as organizations get larger and more complex, figuring out how you're going to pay your people also tends to become much more complex. Well at Despair, Inc., we have implemented a basic strategy called broadbanding. The basic idea is that you divide your employees into categories that are called bands and you have different pay philosophies for each one of those bands.

The first type of employee that we have is very simply the wage earner. And this is in any organization the largest group of employees and they're the people that often do the bulk of the work, but they're expendable and they're replaceable. The second type of employee that we've identified is, we call managers without executive potential. And these people tend to have several skills and they do a lot of work and they understand the organization, but it's clear that there's something about them. They don't have the It factor that enables them to become executives in the organization.

The third type of employee that we've identified is the manager with executive potential, okay. And these are people that once again they're very skilled, but we realize there's something about them that they are likely to be good executives. And then the fourth type of employee is the executive.

We also have five different types of pay that are relevant to our employees. The first one is base pay, and this is a salary or it's an hourly wage. The second is variable pay, and this is very simply a bonus at the end of the year, something that is based on the employee's performance. The third category we have is ownership and this can be stock in the company, it can be an ESOP program options, something like that. We've got perks and this can be something as simple as a company car or it could be a health club membership, something along those lines. And then finally extra benefits, and these include things that most people aren't even aware of, things like better health insurance plans for certain employees.

So let me go through now and fill in this matrix and show you how each band or each group of employees should be compensated. First the wager earners. They should have low base pay and low variable pay. And the reason why is this is a large group of people, and so obviously if you pay them too much, it's going to inflate your costs. But perhaps more importantly, if you overpay wage earners, they tend to stay in the organization too long, far beyond the time when they have outlived their usefulness. And so low pay tends to cause those people to move on when they need to move on. And in terms of ownership, this is obviously not applicable. Perks, non-applicable, and extra benefits obviously non-applicable.

The second category, managers without executive potential, as I'd mentioned earlier, these people tend to be competent, they tend to understand the organization, they tend to have the skills. And so consequently, you want to incent them to not only seek the long term health of the organization, but also to get more work out of the people who work for them. So they should have a low base pay but a high variable pay. And the reason why is you want to incent them to get the wage earners to work.

And then they should have a low amount of ownership. They should have some stock options or something so that they're interested in the long-term health of the organization. But they should have no perks and certainly no extra benefits.

And when you move to the next level, you've got the managers with executive potential. The purpose for your compensation plan shifts at this point. Your purpose here is to simply introduce these people to the burdens of wealth that they will eventually experience. And so they should have a moderate base pay. They should have a high variable pay. They should have a moderate amount of ownership in the company. They should experience a few perks. You don't want to give them too many because it will make them arrogant and that's the last thing you want. And they should experience a few extra benefits. So for example, if you have a separate health plan for the executives, they should be able to participate in that health plan.

And then the final category is the executives and it should be clear that they should have high compensation in every single level. And understand the purpose for the compensation plan for executives is simply to express appreciation for the leadership that they exhibit in the organization. Now it's also important, I should point out, that compensation for executives should not be tied to the financial performance of the company. And the reason why is it's obvious that companies often experience financial difficulty because their employees make all kinds of mistakes. Because the company is going through a stormy time, it may actually be a reason to give executives even higher compensation.

So, this is the compensation plan at Despair, Inc. We have found that it's consistent with our philosophy of radical demotivation. It works for us, and I would recommend that you try it in your organization.