A Publication of WTVP

How much should a person working in a company earn? Do you think you’re earning what you’re worth? As the year draws to a close and budgets are being drawn up, the compensation question looms. Not only is the question a practical one—how much a job is worth or how much can be allocated to salaries— the question has an ethical element, too. What’s fair compensation? What’s a fair differential between workers, managers, and executives?

Your reflex response might be to harrumph, stamp your foot, and say, “Are you kidding? Those so-and-sos are incredibly cheap, and they’re definitely getting a good deal with me.” Or, “For what I have to put up with, they couldn’t ever pay me enough.” Over the years I sometimes have heard, “Yes, I’m paid fairly for what I do.” On one hand I can count the times when someone has said, “Oh, I get paid way too much.”

Then there’s the question of what the boss is making. Major business magazines publish annual reviews of executive compensation in publicly held companies. Some salaries and bonuses are in the hundreds of thousands of dollars to the hundreds of millions of dollars. Compensation is an issue in several corporate scandals, too, with the use of stock options and insider trading. Many an executive was enriched at shareholder and worker expense.

So when, in fact, does greed take over? When is compensation unethical or unfair? When is a person paid more than he or she is worth? How can a company take an ethical approach to compensation?

A key criterion for good work is, “How has this person added lasting value to this enterprise?” Enterprise value has to do with jobs that pay living wages plus value-added skills and knowledge; products that people need, want, and use; logistics that promote efficiency; facilities that promote land value; and knowledge-based assets (also known as intellectual capital). In fulfilling their job descriptions, how do employees add value to the entire enterprise—and at what level?

One basic way compensation is determined, especially in sales, is a base salary plus a commission. That way, the person participates directly in figuring compensation and sharing value that’s been added. Another method is profit sharing; everyone participates in some way in the value all have added. Sometimes merit increases based on performance are tied to added value.

What happens most often is the majority of workers are tied to some kind of benchmark. I’ve served on the boards of organizations whose compensation approach has been, “What do others make? We can’t give the executive director more or less.” In some taxing bodies, compensation is determined by keeping pay levels low so the taxpayer’s ire might be aroused. These are poor ways to determine compensation. The guiding question must always be, “What value has the person added to the enterprise?” That’s true for tax-supported institutions and nonprofits, just like companies.

But we still haven’t dealt with the fundamental question of compensation: what line workers or managers should receive in proportion to executives. In one company, an executive can make 1,000 times what the average worker receives in compensation in a year. In other companies I’ve reviewed, the executive may receive compensation at a multiple of 10 to 20 times.

This is the dilemma of corporate greed and a key element in corporate scandal: people paid obscene amounts of salary, and for what? What really makes a person worth $35 million annually and another person with similar education and background worth $55,000 annually? What is the multiple in your firm? Why is the multiple at that level? What should it be? Why?

These, often, are the questions never asked by corporate boards or business executives. The compensation simply is assumed to be right. Workers know, though—especially those who work in the trenches and, in a very real way, add value daily through the products they make or the ideas they develop into profitable lines of business.

Building trust in a large or small business is a transparent approach to compensation, tying pay to value. Instead of saying, “Employees are our most valuable asset,” perhaps it’s time to say, “Our assets are valuable because of our employees.” Or as one business puts it, “If we didn’t have our employees, we would have no company.” Taking this more humble approach not only leads to fairer compensation—it motivates employees to do their best daily and to add value in whatever tasks they take on. IBI