Book SummaryScaling Up Compensation, by Verne Harnish and Sebastian Ross

1-Page Summary1-Page Book Summary of Scaling Up Compensation

Compensation: Connecting Your Approach and Organizational Culture

Align Pay With Company Objectives and Core Beliefs

Harnish and Ross emphasize the critical importance of aligning your compensation system with your company culture and strategy, making it a powerful driver of growth and a key differentiator in the marketplace. This alignment generates a beneficial loop in which the right talent is attracted and retained, resulting in improved outcomes and increased value.

Successful Companies Tailor Unique Compensation Systems to Their Cultures and Goals

The authors highlight that a successful compensation system should not be a generic copycat but a distinct design that reflects your company's specific culture and strategy. They showcase this through various examples, most notably Lincoln Electric. Lincoln Electric, despite its seemingly harsh piece-rate system, consistently attracts and retains high-performing individuals by offering some of the best pay in the manufacturing world. This unconventional system, as described by Dan Cable, works for Lincoln Electric because it successfully aligns with their culture of psychological ownership and emphasis on excellence, which leads to exceptional products valued by their customers.

Another example is the retail company specializing in storage solutions. They champion the principle that one exceptional employee equals three competent ones, strategically investing in hiring and retaining exceptional staff by offering them salaries that are up to double the industry average. This investment, according to Tindell, a co-founder of the retailer, reflects their meritocratic culture and their belief in recognizing exceptional achievement.

Other Perspectives

• The focus on a piece-rate system could inadvertently lead to a compromise in quality if employees prioritize quantity to maximize their earnings, which could harm the company's reputation for excellence in the long run.
• While Lincoln Electric may offer some of the best pay in the manufacturing world, this does not guarantee that all high-performing individuals will be attracted or retained, as other factors such as work-life balance, job security, and career development opportunities can also play significant roles in an individual's employment decisions.
• There's a risk that the definition of 'exceptional' is subjective, and the company's approach to recognizing and rewarding it may not be equitable or transparent.
• Relying heavily on exceptional employees can pose a risk if they decide to leave the company, potentially causing instability and knowledge gaps.
• The strategy of offering high pay to attract exceptional talent may not be sustainable for all companies, especially startups or those with limited financial resources, which could limit their ability to produce exceptional products.

Compensation Attracts Talent and Signals Valued Behaviors

Harnish and Ross highlight that compensation isn't just about rewarding work but also about attracting and signaling valued behaviors. They illustrate this through TMC, a company that provides teleradiology services, which emphasizes the core principle of being "Generous Experts." TMC attracts radiologists who are not just highly specialized but also humble and eager to share their knowledge by implementing an open and fair compensation system, intensive assessment processes, and rigorous quality control mechanisms. The authors explain that this method reinforces their strategy...

Scaling Up Compensation Summary Creating a Reasonable and Adaptable Compensation Framework

Formal Pay Structure: Job Categories, Salary Levels, and Pay Bands Ensure Equity

A clearly defined official salary framework is needed to ensure fairness and transparency, especially as businesses expand. The authors explain that this structure should consist of job categories, pay levels, and pay ranges to accommodate both internal and external equity.

Set Pay Using Outcomes, Not Experience or Title

According to Harnish and Ross, base pay should primarily reflect an employee's sustained performance and market value for the role, not their experience or job title. They caution against solely relying on length of experience as a measure of competency, and remind readers that ten years in a role might just be one year of experience repeated ten times.

As outlined by Zingheim and Schuster, the authors identify three key drivers for determining base pay levels: 1) competencies, which should be constantly updated and relevant to the role; 2) sustained performance, which considers consistent high performance, not temporary spikes in output; and 3) relative labor market value, which takes into account the employee's value in the external market but should also align with...

Scaling Up Compensation Summary The Limitations of Individual Financial Incentives

Motivators May Cause Goal Conflicts, Gaming, and Reduced Collaboration

Harnish and Ross caution readers about over-reliance on personal monetary incentives. While they might be effective for simple, repetitive tasks, they often lead to undesirable side effects like conflicting objectives, gaming the system, and reduced collaboration.

Financial Incentives Shape Behavior Through Selection and Messaging, Not by Directly Motivating Effort

The authors acknowledge that monetary incentives have limited effectiveness as direct motivators, drawing on research by renowned motivation theorists like Maslow, Herzberg, Deci & Ryan, Pfeffer, and Pink. They argue that monetary rewards primarily influence behavior through selection (attracting those who value financial compensation) and information (signaling what's important to the company), rather than by motivating employees to work harder.

The authors illustrate this point through Egon Zehnder International, a prestigious executive search firm that deliberately avoids individual bonuses and comisiones, instead opting for a profit-sharing model based on seniority. This approach, according to founder Egon Zehnder, reinforces their...

Scaling Up Compensation Summary Using Group-Based Gain-Sharing Schemes

Using Programs That Encourage Achieving Key Metrics Works

Harnish and Ross propose using shorter-term gain-sharing schemes as a more effective approach than individual incentives. These strategies revolve around gamifying business objectives and rewarding groups or the whole organization for achieving specific goals tied to critical business metrics.

Plans Leverage Informational and Group Responsibility Effects Over Financial Motivation

The authors highlight how providing information is the primary driver of successful gainsharing. By making company priorities more specific, tangible, and rewarding, these schemes inform employees about the most important aspects. They further explain that gamifying these programs can boost engagement and make the financial reward secondary, tapping into people's natural desire for fun and competition.

Harnish and Ross showcase MiniMovers, an Australian moving business, which incentivizes a "no breakage" culture by offering a quarterly bonus funded by part of their revenue. This bonus is only distributed if no items are broken during the quarter, encouraging shared responsibility and mutual accountability.

Practical Tips -...

Scaling Up Compensation Summary Sharing Profits and Company Value With Employees

Profit-Sharing Aligns Employee-Owner Interests, but Impact Is Limited

Harnish and Ross support profit-sharing as a fair gesture and a method to instill an "ownership mindset" among employees. However, they point out that the effect on individual effort and motivation can be limited.

Profit-Sharing Creates Fairness and an "Owner" Mindset Rather Than Directly Increasing Effort

The authors emphasize that sharing profits primarily serves to align employees' interests with those of shareholders. It encourages a long-term perspective and incentivizes decision-making that benefits the company as a whole. However, they clarify that it's not a reliable tool for driving individual effort, as the link between individual actions and overall earnings is often too distant and abstract.

Harnish and Ross showcase Access Fixtures, a lighting distributor, which implemented a 20% profit-sharing program on top of competitive salaries. They emphasize how the strategy, coupled with a policy of transparency, fostered an ownership mindset, leading to more prudent decision-making by employees, such as cutting unnecessary expenses and scrutinizing new hires based on their potential...