Fair Compensation – Ownership Model

Is it really fair that people work on a per-hour basis?  Having worked in a company where I have ownership, it feels like hourly compensation is a relatively poor motivator to work.  Moreover, it is costly to the employer and, ultimately, might not be the best in terms of providing incentive.

So, I suggest the following, very simple alternative, which consist of:

  • everybody is compensated from dividend pool proportional to:
    • their level in the company.  Level is a multiplier/weight of how much a person gets at the comany.
    • the amount of time they spent working for the company
  • if a person leaves, then there is a dissipation period during which they continue to be compensated

So, to calculate compensation:

Total Payout = Compensation for Person 1 + Compensation for Person 2 + … + Compensation for Person N

Compensation for Person N = X * Time Person Spent/Time Limit * weight of person in the company

X is what we solve for to be able to calculate individual compensation

So, for example, if the total payout is $100 and the executive level has weight 2 and there is one CEO who has been with the company for 1 year and operational staff has level of weight 1 and there are 3 people who have been there for 1, 2 and 3 years respectively and we set the maximum limit for calculation of 2 years.  And suppose we also have 1 person who left a year ago after working there for 10 years.  Then we have the following:

$100 =  // This is the total that we want to pay out
X * weight of 2 * 1 year /2 years +  // This is for the CEO who has a weight of 2 and was here for 1 year
Staff 1:(X * weight of 1 * 1 year / 2 years) + // This is for Staff 1
Staff 2:(X * weight of 1 * 2 years / 2 years) + // This is for Staff 2
Staff 3:(X * weight of 1 * 2 years / 2 years) + // This is for Staff 3, we cap ownership at 2 years
Fired Staff 1:(X * weight of 1 * (2 years working – 1 year ago was fired)/2 years) // The fired guy’s compensation goes down over time

And this is:

$100 = X + X * 0.5 + X + X + 0.5X= 4X

X = $100 / 4 = 25

So, compensations are:

CEO: 25
Staff1: 12.5
Staff2: 25
Staff3: 25
Fired Staff: 12.5

To further make things fair, the owner can set aside a specified chunk of ownership such that, if the company is acquired, everyone is compensated in accordance to this model.

I am about to try this with a small side-venture.  If you have any suggestions, would be very happy to hear them.  The main idea is to create optimal environment for everybody to profit without robbing the founder/owner of control/ownership of the company.


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