Image Source: New Yorker

Image Source: New Yorker

It’s quite funny how these “principles” seem to work every damn time. Take the Pareto principle for example. For those unfamiliar, it’s the principle that states 80% of effects comes from 20% of causes.

In business, this translates to 80% of sales come from just 20% of clients – the reason why, in banks, if you just transact by hundreds or thousands, you face the teller or just use an ATM. If you transact by the hundreds of thousands, you transact with the manager, privately and with coffee. (If you transact by the millions, you actually have someone do it for you.)

Even in the workplace, this seems to apply. Often, when you examine worker productivity, it seems that bulk of the output comes from just a handful of performers. Unless, of course, you’re lucky enough to work in an organization were everyone’s smart and gets things done. One theory even suggests that it’s not even 20% but very select individuals that can be labeled hyperper-formers.

Unfortunately, if you’re thinking that compensation then should reward these performers, you might be saddened by the idea that, if we go by Pareto yet again, then 80% of total cost of salaries go to the top 20% in the organizational hierarchy. While I caution making this a generality, I find this common to most organizations I’m familiar with.

Now this can be a problem on different levels if there’s a commie inside you. First, you get to think that the 20% performers should be getting bulk of the dough. Second, you might ask how should performance be appraised in, say for example, the creative industries. How would you even start to quantify creative contributions in overall business impact? How do you reconcile that with the idea of the CEO getting the most bucks ? Do things like strategy and direction trump grunt work?

Unfair? Maybe. But let’s forget about organizational hierarchy and deal with performance-salary correlation on one rank. Is it fair for people of the same rank to get pretty much the same salary if only a handful really carries the burden of delivering results?

Organizations deal with compensation differently. Too bad, many operate in a manner where salary increase is a function of performance. I am a staunch believer in the idea that salaries shouldn’t be entirely performance-based. For one, yearly increases which often happens after the ritualistic performance review and appraisal hoopla doesn’t really reward performance. It only does only if it’s substantial enough to offset the effects of inflation (rise of prices) and give you more buying power for the year.

Let’s use some amateur economics to see how this works. (See this online salary-inflation calculator.) For example, you currently earn Php 20,000 a month, and then you get a Php 1,000 increase thanks to you working your ass off. That’s a 5% increase. Inflation from last year is 2.8% which means, this year, you can buy 2.8% less stuff with last year’s money.

That’s okay since you got 5% more money, but that also means that you only have 2.2% or Php 440 as effective increase. Take away tax and you’d probably end up with something that you can use to buy one movie ticket and popcorn per month as “reward” for your dedicated service. That’s the difference between you and the slacker who didn’t get an increase this year. A movie ticket and a popcorn. Stings. What’s even more irritating is when companies simply hand out bonuses to everyone regardless of performance.

One way to remedy this is to have performance rewarded for its contributions to a company’s profitability and stability through substantial performance bonuses. Salary increases should still happen anyway to maintain the employee’s buying power. This way, even if salaries are maintained relatively low, performance-based bonuses reward those who truly perform taking out the syndrome of top performers receiving almost squat compared to the rest of the slacking workforce provided that there are no gimmicks in how performance is reviewed and appraised. This also motivates people to perform every year.

So where does this leave Mr. Bibo Kid at work? Pointing it out to management is one. Negotiating for a better compensation package is another. Otherwise, find better opportunities where real efforts get real rewards. Like be a CEO. That way, you get the most dough.

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