The Value in Value-based Compensation

  • March 15, 2019

Purely fixed wage compensation creates an inherent conflict of interests. Is there a better way?

When you provide a service for an hourly wage, a yearly salary, or a per-project price you inherently separate yourself from those that continuously bear the burden of ownership of the company. The employee cares about their continued opportunity to work and get promotions. The consultant cares about future contracts and referrals. Both are short-sighted goals when compared with the prorites of the owner and part-owner, who must care about the continued profitability of the company.

Equity-based compensation, on the other hand, is seen by many as unacceptably risky. It’s better to receive a small paycheck than no paycheck at all. Also, it can have the unwanted side effect of causing the holder to make decisions that are profitable for that quarter, with less regard of any consequences that might occur beyond that timeframe. Or, the equity can be put straight in a 401(k) and so be inaccessible in their minds.

What changes if instead of asking for a raise on your next contract or next quarter, employees and contractors would ask for conditional bonuses based on the value their work adds to the company over time? For example, instead of asking your boss or your client to pay you x more dollars next quarter, you say “instead of asking for a raise, I want a conditional bonus of 1-10% of the value my project creates for the company over the next year. If my project doesn’t create new net profit, I don’t get any bonus.”

Under this model, suddenly your workforce begins to care about the long-term effects of their decisions. You’ve changed teams of coworkers into partners sharing potential gains from their project. You can still recruit people because you’re presumably paying a decent or near-decent base wage. When things don’t go well, your workforce should still be able to pay the bills and have more data to try again next time. Your workforce suddenly has access to unlimited earnings potential. If you wish to drive innovation in your company, consider giving the contributor access back to a significant portion of the wealth that they create.

Fixed wages creates a culture focusing around securing increasingly larger slices of the pie. In contrast, when significant enough, value-based compensation creates a culture of interested parties that work together to make a bigger pie. Which culture would you rather work in?

Tags

Leave a Reply

Your email address will not be published. Please mark all required fields.