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Have You Ever Been “Right” Paid?
Last weekend, Sundar Pichai’s compensation package was making the news rounds. Why was it the topic of conversation? $200M. There are only three possible reactions when we think about compensation: too much, too little, or just right. In this post, I’m not going to examine whether Sundar’s compensation was any of those. I am going to examine the more thorny topic of what should be the right amount and more importantly how to think about the process of setting that compensation level.
Out of those three options, there is one we can rule out, which is the “just right” case. In the hundreds of compensation discussions I’ve had over the years, I have never been the recipient of a “wow, this is exactly what I was expecting and I feel this is the absolutely right number!” as the reaction. Neither have I felt “incredible, this is exactly what I think I should be paid!” in the many discussions I’ve had with my managers. That means that the “just right” option can be taken off the table as having any legitimacy. The feeling is either “that’s too much”, like so many felt last weekend about Sundar’s compensation, or “that’s not enough!” which is likely what most of us feel when our updated salary finally arrives
The age old paradigm has been to squeeze as much as we can out of our labor force while paying them as little as possible. On the one hand this is fiscally correct and fiduciarily responsible, on the other, it seeds resentment and dissatisfaction. Employees aren’t eternally grateful to their employers, looking for ways to please their paycheck signers with favors and sweat equity. The bottom line is, an unhappy employee is an unproductive employee. In our financially driven world, we exchange our time working for a particular employer for compensation. The main way for an employer to truly show that they value the contributions of their staff is to pay them, and pay them well.
Compensation should not be determined on anything other than value. If we think of a particular employee, the question shouldn’t be “how little can I pay them?” but rather “what will it cost my organization if this employee walks out tomorrow?” That is the value of that employee, and you should likely be paying them just a little over that number to keep everything working smoothly.
To give a specific example.
Imagine you have a long tenured employee with deep knowledge of your customers, the business process, and the relationships that enable your organization to succeed. They are well liked by their peers and respected by the management chain. In the cost minimization view of the world, you look at what the market pays the Customer Success Manager, give a small multiplier to their tenure, and call it a day. When that employee complains, you say “you know, you are right, but this is the market rate for your role, and in fact, we are paying you above market rate”, but obviously not by much.
Lets pause and imagine this employee, knowing exactly their value add to the company, is upset enough at their compensation, and then chooses to walk out the door. What is the direct and indirect cost to your organization? How much will it cost your company to figure out all the knowledge gaps that the individual had? What about all those emails from loyal customers that won’t be answered, or the fact that they knew the name of that supplier in North Dakota that no one could ever get to ship the widgets on time, except this special employee. If you are a business owner, you are suddenly crunching the numbers and likely breaking out in a sweat as this nightmare scenario unfolds. Then you start to worry even more, what if they went to your competition across the street taking those accounts with them, and Monday morning a LinkedIn congratulations is going to land in your inbox.
There is a big difference between not giving your employee a generous raise that maybe overwhelms them a bit and seeing multiple $xM accounts walk out the door. Suddenly, that raise they asked for looks like a bargain. This is why you should always be looking at the value of what the employee brings and enables as the way of setting compensation, not cost minimization.
I work in the technology sector where our compensation consists of three parts, base pay, bonus, and equity. The bonus is what the company pays you for the work you did last year, equity is forward looking for your “future” potential value to the organization, and base is what they have to pay because that is what everyone else pays in your role.
On paper, this structure seemingly makes sense. In practice, equity isn’t guaranteed, often referred to as “Golden Handcuffs” when in fact, people are happy to leave equity on the table when unhappy. Bonuses are paid out infrequently while being hampered by multipliers and guidelines that don’t truly reward for the impact delivered. Technology is an exception in how it pays. Most of the industries out there don’t even have an equity component and bonuses often mean a tri flavored popcorn tin or a $50 Amazon gift card during the holiday season. Therefore, the only retaining element month after month is the base compensation.
When thinking about the compensation number, don’t bother to look at what others are paying. It’s irrelevant. Your objective is to retain the talent that keeps the wheels of your organization churning. In order to do that, you need to start backwards and ask yourself, how much is this employee worth to my organization? If you are a glass half empty type: how much sleep will I lose if they walk? Then, figure out what you can pay, and do that, market rate be damned. Employee satisfaction isn’t about bargain hunting, it’s about value maximization and business enablement. If that Customer Success Manager is the one holding millions of dollars of revenue together for your organization, I’m certain that you can find a way to pay them an amount commensurate with their impact. If you choose to pay them 5% more than the competition across the street then be prepared for the consequences.
Bringing us back full circle. Is Sundar Overpaid? Underpaid? Right paid? Ultimately it doesn’t matter, because if Sundar walks, the cost to the organization just might be much, much more than his compensation package. Consider this, during Sundar’s tenure he’s grown Google’s value 2x to over $1.3T. Using that metric, the $200M compensation doesn’t seem that much at all, in fact, it almost seems like a bargain. On the other hand, maybe Sundar leaving will enable a new crop of leaders to emerge who will find a way to 2x Google’s value moving forward. Since this question isn’t up for debate now, that means that for the foreseeable future, we all get to sit on the sidelines and gossip about the $200M.