My name is Lawrence Kersten, and I'm the Co-Founder and COOof Despair, Inc. And today I'd like to talk to you about developing acompensation plan. You know, as organizations get larger and more complex,figuring out how you're going to pay your people also tends to become much morecomplex. Well at Despair, Inc., we have implemented a basic strategy calledbroadbanding. The basic idea is that you divide your employees into categoriesthat are called bands and you have different pay philosophies for each one ofthose bands.
The first type of employee that we have is very simply thewage earner. And this is in any organization the largest group of employees andthey're the people that often do the bulk of the work, but they're expendableand they're replaceable. The second type of employee that we've identified is,we call managers without executive potential. And these people tend to haveseveral skills and they do a lot of work and they understand the organization,but it's clear that there's something about them. They don't have the It factorthat enables them to become executives in the organization.
The third type of employee that we've identified is themanager with executive potential, okay. And these are people that once againthey're very skilled, but we realize there's something about them that they arelikely to be good executives. And then the fourth type of employee is theexecutive.
We also have five different types of pay that are relevantto our employees. The first one is base pay, and this is a salary or it's anhourly wage. The second is variable pay, and this is very simply a bonus at theend of the year, something that is based on the employee's performance. Thethird category we have is ownership and this can be stock in the company, itcan be an ESOP program options, something like that. We've got perks and thiscan be something as simple as a company car or it could be a health clubmembership, something along those lines. And then finally extra benefits, andthese include things that most people aren't even aware of, things like betterhealth insurance plans for certain employees.
So let me go through now and fill in this matrix and showyou how each band or each group of employees should be compensated. First thewager earners. They should have low base pay and low variable pay. And thereason why is this is a large group of people, and so obviously if you pay themtoo much, it's going to inflate your costs. But perhaps more importantly, ifyou overpay wage earners, they tend to stay in the organization too long, farbeyond the time when they have outlived their usefulness. And so low pay tendsto cause those people to move on when they need to move on. And in terms ofownership, this is obviously not applicable. Perks, non-applicable, and extrabenefits obviously non-applicable.
The second category, managers without executive potential,as I'd mentioned earlier, these people tend to be competent, they tend tounderstand the organization, they tend to have the skills. And so consequently,you want to incent them to not only seek the long term health of theorganization, but also to get more work out of the people who work for them. Sothey should have a low base pay but a high variable pay. And the reason why isyou want to incent them to get the wage earners to work.
And then they should have a low amount of ownership. Theyshould have some stock options or something so that they're interested in thelong-term health of the organization. But they should have no perks andcertainly no extra benefits.
And when you move to the next level, you've got the managerswith executive potential. The purpose for your compensation plan shifts at thispoint. Your purpose here is to simply introduce these people to the burdens ofwealth that they will eventually experience. And so they should have a moderatebase pay. They should have a high variable pay. They should have a moderateamount of ownership in the company. They should experience a few perks. Youdon't want to give them too many because it will make them arrogant and that'sthe last thing you want. And they should experience a few extra benefits. Sofor example, if you have a separate health plan for the executives, they shouldbe able to participate in that health plan.
And then the final category is the executives and it shouldbe clear that they should have high compensation in every single level. Andunderstand the purpose for the compensation plan for executives is simply toexpress appreciation for the leadership that they exhibit in the organization.Now it's also important, I should point out, that compensation for executivesshould not be tied to the financial performance of the company. And the reasonwhy is it's obvious that companies often experience financial difficultybecause their employees make all kinds of mistakes. Because the company isgoing through a stormy time, it may actually be a reason to give executiveseven higher compensation.
So, this is the compensation plan at Despair, Inc. We havefound that it's consistent with our philosophy of radical demotivation. Itworks for us, and I would recommend that you try it in your organization.
