Me and My Big Mouth

Everyone gets everything he wants. I wanted a mission, and for my sins, they gave me one.
~Captain Benjamin Willard (Martin Sheen) in Apocalypse Now

Now I’ve gotten myself into it.

Last week, I sat down with the boss and talked about the company’s compensation policy. The year-end review season is upon us, and he admitted to not really knowing how some of the many bonus decisions may interact and what their eventual financial impact may be. He asked me to put together a model that incorporates all the various compensation schemes by division, function, and pay scale. Ideally, such a tool would be explanatory, predictive, and flexible enough to play with under “Monte Carlo” multivariable scenarios.

“You’re perfect for this”, he said, “because you’re an investment professional who has worked in firms with sophisticated compensation policies.”

“And”, I replied, “I’m not a part of this one.”

Agreed. So he asked, point blank, if this was something that I could do.

That’s always the death knell of critical thought for me. Asked a direct question that may reflect on my intellect, skills, or character, I will always automatically respond that whatever challenge is at hand is completely surmountable. By me. Personally. Alone.

Actually, the way it really came about this time was during the split second in which I mulled over the question. “I’ve never tried to analyze a compensation policy and failed at it”, I thought, “So I see no reason to believe that I would fail now.”

Taken to slightly more distant lengths, the logic gets a bit shaky. “I know where the English Channel is, I know what’s on both sides of it. Hell, I even speak English. I see no reason to believe that I can’t swim the English Channel.”

So I answered that I would absolutely be able to do it. Quickly, I was buried under an avalanche of financial reports, fund mandates, employment agreements, department data, and other inputs. (The information was stripped, by the way, of any identifying marks that would compromise employee privacy.)

Over the course of the next few days, I came up with a complex spreadsheet that incorporated all the data, assumptions, and possible scenarios that would affect company performance. These all fed into the different compensation schemes with their own assumptions. Eventually, all these numbers filtered down into a financial report that showed the net effect of compensating employees certain ways under given scenarios.

It is - I think I’m not being immodest in saying - an elegant solution to the problem.

I presented it to the boss this morning, and he absolutely loved it. Finally, he has a tool that will spit out a number after considering a mind-boggling number of variables. The problem with the compensation scheme, however, is that department bonus pool numbers are easily quantifiable, but most individual employee bonuses remain subjective.

So we talked about the effect that a lack of transparency has on employees, and what sort of incentive an incentive compensation plan provides if a participant can’t judge his or her own contribution to, and share in, overall success.

It was an interesting conversation about the role of individuals in organizations, organizational behavior, responses to stimuli, and psychology. The problem is that by the end of it, I had somehow agreed to design alternative policies for more objective quantification of the incentive compensation program. Of course, I’ve never done anything like that before.

“Well”, I said to myself, “I have no reason to believe that I couldn’t….”