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Compensation Structure

Compensation must always try to balance recognition of the individual with stability and maintenance of the group.

People have to be paid, but every compensation system is liable to misdirect. Compensation always express status, both within the enterprise and in society. It entails judgments on a person’s worth as much as on performance. It is emotionally tied to all our ideas of fairness, justice, and equity. Money is, of course, quantitative. But the money in any compensation system expresses the most intangible, but also the most sensitive, values and qualities. No attempt at a “scientific formula” for compensation can therefore be completely successful.

The best possible compensation plan is of necessity a compromise among the various functions and meanings of compensation, for the individual as well as for the group. Even the best plan will still disorganize as well as organize, misdirect as well as direct, and encourage the wrong as well as the right behavior. The preference should be for simple compensation systems rather than for complex ones. It should be for compensation systems that allow judgment to be used and that enable pay to be fitted to the job of the individual rather than impose one formula on everybody. All one can do is to watch lest the compensation system reward the wrong behavior, emphasize the wrong results, and direct people away from performance for the common good.

ACTION POINT: Develop a compensation system that rewards individual performance while balancing individual rewards with rewards that help maintain the continuity of the entire organization as a whole.

Management: Tasks, Responsibilities, Practices

* Source: The Daily Drucker by Peter F. Drucker

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