There was a lot of excitement when people learned that the new management system is a radical change in the compensation model. After all, When your compensation is based on the business revenues, there aren’t any limitations for the amount of money anyone can take home.
Few people understood that this radical change is one of the primary incentives to make sure that self-managed people and self-organized groups will work. When John manages to sell this approach to the board, he based his argument on researches that prove the correlation between the willingness and awareness to include others in individual decisions and the impact of his decisions on the company revenues and as a result his personal compensation. Most of the people just thought that matching their salary to the company revenues is a great idea, and they loved it.
Now, for the first time, a group of five people gathered to take the first real action to make the theory a reality. Each one of those five people filled at least one function within the central entity (entity is the equivalent of a group) that is the gravity force for all other entities (in our term, we call this primary group a galaxy). This group of people was about to start one of the complicated and complex tasks that each group needs to deal with. They had to split company revenues allocated to compensations between all groups and functions that are part of the Galaxy. This task is one of the balances between the autonomy that each entity has and the need to create unity and collaboration to reach the Galaxy purpose. Each Entity should separate (what they got for compensations) to percentages between all the functions and entities that are part of the entity, based on entities and functions contribute to the purpose of the group. Since each entity can split what they got from the entity they are part of, the split between galaxy’s entities and functions has a significant impact on all other entities and functions.
The galaxy entity didn’t have any lead, as they decided not to elect one. But, all the eyes were looking at John, who was the unofficial accepted and appreciated leader. “We all know why we gathered here,” said John. As you all know the financial entity already agreed upon the percentage of our revenues that should be allocated for compensation without any conflict raised. They also send us a recommendation how to split in portion the total percentage allocated for compensation between all functions and groups that are part of the galaxy. We need to decide if we want to approve or change this allocation. All we need to keep in mind is that the distribution need to be in line with each entity and function contribute to the galaxy and that our decision can be challenged by raising conflict and mitigate using the conflict resolution process.
“Let me share with you the Financial entity recommendation how to spread compensation percentage between all galaxy’s entities and functions” John kept on talking.
Boots Entity: 11%
Sneakers & Athletic Entity: 11%
Heels Entity: 15%
Sandals Entity: 6%
Loafers Entity: 5.11%
Oxfords Entity: 30%
Slippers Entity: 10%
Financial Entity : 3%
Strategy Entity : 2%
R&D Entity: 4%
CEO Function: 1.03%
CIO Function: 0.5%
CFO Function: 0.6%
COO Function: 0.75%
Evolving : 0.01%
The financial group recommendation is based on the percentage of revenues each entity responsible for and an assessment of the contribution of all the functions that are part of the Galaxy entity.
My recommendation is to start with the Entities responsible for direct revenues (the first seven entities). Let’s go around the table to hear other people thoughts. As expected, no objections raised.
John continued, do you think it is right to allocate 88.11% of compensation to the first seven entities and the rest (11.89%) to other entities and functions that are part of the Galaxy?
This time Andy (who is filling the COO function) raised a concern. “Are we sure that 12% of the allocated compensation should go to functions that are not directly responsible for generating any revenue?” Andy asked as he is looking at the other four. Roy (who is filling the CFO function) was the first to replay. I’m not sure if the allocation should be 12% or 5%. I know for sure that other functions within the galaxy, although not directly generate any revenue, are contributing to the revenues in different ways. Andy immediately agreed with the concept but reiterated that he can’t understand and couldn’t be able to explain to others what is the logic behind allocating 12% to supportive functions on the Galaxy level.
After a long silence, Jone was the first to share his thoughts. Let’s try to understand the allocation of the main galaxy supporting entities and functions. The majority 9% allocated to supporting entities (Fin., R&D, and Strategy). Each one of them has a significant impact on current and future revenues of our organizations. The rest 3% allocated to functions within the Galaxy. Both the galaxy’s entities and functions that are not generating revenues are key functions and entities needed to support the business and help us to be compliant with law and regulations. Those functions and entities require people that are hard to get, and we need to make sure that we allocated enough percentages to those entities and functions to enable the company to attract the higher talent and compete with other players in our industry to hire them. Roy, can you please validate that the current allocation based on the roles and the number of people that filling them enable us to be attractive enough to hire talent, or we allocated too much. Can we add more compensation percentage to revenue generating companies and decrease percentage to other Galaxy’s entities and functions?
Actually, Roy replied, this is precisely the logic that we followed when the Financial entity discussed the suggested compensation allocation. I can easily share the numbers with all agents when we are going to share compensation allocation, and I can use those number in any conflict resolution process if it is required. “Do you have the numbers here, so we can base our decision on them?” asked John. As John asked the question, Roy projected all the data so that all attendees can view the data and he is starting walking through the data.
When Roy finished his explanation, John asked again for the group opinion on the allocation. This time there weren’t any objections. John smiled and kept on talking. I’m not sure that we have the right distribution now, but I’m sure that over time we will fine tune the compensation allocation and gradually making this process and the results more accurate and supportive for the company needs. No method or system is perfect, and I’m sure this process has its flows. But I’m 100% sure that this process is more transparent and share the revenues that we all worked on based on a more fair basis that base on facts rather people assumptions and perceptions.
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