The Flat System

4 February 2013

Posted in Workout

Some people argue that organizations should get rid of their bonus systems. They say most of an organization’s performance is in the system, not in the people, and therefore it’s best not to differentiate between employees. Everyone should get the same bonus. However, by the same reasoning it then also follows that everyone should be getting the same monthly salary. After all, how can you measure that the CEO works any harder than the receptionist?

I believe a flat compensation system doesn’t address the challenge of paying employees what they really earned. First of all, there is the problem that roughly 80% of all people think they perform better than average [Haidt, The Happiness Hypothesis p.67], and thus, when everyone gets the same as everyone else, 80% of the workers will feel underpaid. (It won’t be true, but you can’t argue with feelings without real data.)

Second, while bad fortune in business is usually absorbed with conservative salaries and incidental layoffs, good fortune should likewise be enjoyed with extra payouts and by hiring new people. When you don’t pay any extras to workers, the workers share the burden of setbacks, while only the business owners reap the benefits of success. This is probably not motivating to most people. (It has certainly never motivated me.)

Last but not least, organizations should try to benefit from unpredictable events in their business environments. They should be antifragile [Taleb, Antifragile l.1672], which means they must get used to dealing with fluctuating revenue streams. And employees should be managed to deal with flexible income. Those who insist that income must be constant automatically guarantee that their organizations will be fragile. (And they will earn a constant income of zero after failure.)

In other words, the flat system is a bad alternative to the bonus system. Can we do better?

This text is part of Merit Money, a Management 3.0 Workout article. Read more here.