Variable compensation is intended to motivate employees and align their interests along with those of the owners of the company. The pool of money available to share with the employees is usually determined by how well the company has done. The available pool of money is distributed to the employees based on a combination of their responsibilities and their performance. In other words, devoid of performance consideration, higher level employees will receive larger sums than lower level employees. Top management then adjusts these sums to reflect employee performance. Employees seldom understand the rationale behind the distribution. They usually resign themselves to what they see as a reality of life – management will get more whether or not they do a good job, and the worker-bees will get less no matter what.
So, why not empower the employees to dole out the available pool of money? Employees submit to the CEO their recommendation on who should be rewarded and how much they should receive, along with their justifications for their recommendations. Each employee can recommend any set of employees in the company, other than themselves. To keep these recommendations constrained, each employee is allowed to dole out as much money as they would have received from the pool devoid of performance considerations. So, if the available pool of money, distributed without regard to employee performance, would have delivered manager A $4000 and worker B $300, then manager A gets to dole out $4000 and worker B gets to dole out $300. This way, the CEO receives recommendations for precisely the amount of money available in the pool. The same amount of money is now being given away, except, not by management but by the employees. The distribution is still performance based – performance, as determined by peers, not management.
How will this motivate employees? First it empowers them to reward the deserving. It has been our experience that, by and large, when such responsibilities are placed on employees, they will take it seriously. Knowing that the CEO is going to review their recommendations, employees will put some thought into them. Further, it will force employees to understand, recognize and appreciate their colleagues’ contributions.
The cynical manager might lament that lower level workers, more numerous than management, will simply distribute all of the money amongst themselves and neither appreciate nor reward the stress and responsibilities carried by management. The cynic should note that the amount of money that lower level workers have to dole out is exactly equal to what they should collectively be receiving. So, the cynic’s concern is not as acute.
Clearly, the CEO can put in place some elements of caution. For example, the CEO might use this method to distribute only half the available funds, holding the other half to be distributed through more traditional top-down means. The CEO might reserve the right to veto errant recommendations that violate certain fundamental principles of ethics and company policy. But it is important to preserve the integrity of the employees’ recommendation to instill a true sense of empowerment.
Dr. Balaji Krishnamurthy has been recognized by TIME, CNN, Wall Street Journal and other national publications for his unique and innovative style of corporate leadership. Unlike most consultants, he is an operating executive with 32 years of experience running 15 different businesses.
We have known and worked with a number of organizations that have cultivated such an empowered culture. If you would like to learn more about a corporate culture of empowerment or how you can build such a culture within your organization, please contact us.