Design a Fair Compensation Plan

The agile management guru Jurgen Appelo shared a well-thought compensation plan in his book Management 3.0 workout. The main idea is that rather than based on the time people spend in work or only the results of their work, people should be compensated based on two types of effort they put in work: the effort of pursuing new things that add value through experimentation (innovation), and the effort of following good practices that are already known (deliberate practice). And in order to measure the efforts, we must rely more heavily on peer pressure since coworkers are fine observers of each other’s behavior.

A compensation plan covers two parts: a salary formula and a merit/bonus system.

Part one — design a salary formula:

Step one: Group people into broad categories (C). Categories are defined by the strategic value the group adds to the business model and allocated with different weights accordingly (e.g. in a software development company, developers should be grouped into one separate category that has the highest weight). Each person is identified into only one category based on his main responsibility/contribution.

Step two: Subcategorize people of the same category into “tags” (T), based on their secondary or tertiary responsibilities. Each person can have from zero to multiple tags. Like categories, tags…