Firms struggling with compensation decisions often lack a process that ensures consistency, fairness, and transparency. While subjective compensation systems are most problematic, poorly designed and administrated objective systems are just as troubling. Compensation systems that fail to reward profitable practice habits are ineffective, can lead to defections, and result in poor performance.
4 typical characteristics of an Ineffective compensation system include:
1. Lack of Market Knowledge
Insular approaches toward compensation that are out of step with market compensation levels are common in struggling firms. Not appreciating the range of compensation levels available from competitor firms can result in overpaying and underpaying - both are bad for the sustainability of the firm. An inability to pay at market levels is also often an indication of profitability issues.
2. Inconsistent Compensation Awards
Awards that do not correlate to contributions are typical in firms with weak compensation systems. When compensation levels are contradictory, concerns about favoritism, politicking, and gamesmanship can create a toxic environment. In addition to poor morale, performance will suffer because compensation will not consistently correlate to contributions.
3. Unclear Expectations and Rewards
Lack of clarity about the factors that impact compensation works to undermine the system's effectiveness. Failing to explain the weight given to each element is equally corrosive. Weak compensation systems are often oversimplified and lack accountability. Compensation plans require a level of complexity to retain their effectiveness.
4. Lack of Transparency and Objectivity
A weak compensation system fails to communicate the most critical strategic and financial priorities of the firm. Compensation systems that lack transparency and objectivity almost always create problems. In addition to poor morale, counterproductive behaviors based on perceptions about how to game the compensation system are self-defeating. For example, if the impression is that gross fees are most important, taking work at any billing rate seems like a way to win.
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