Professor Dylan Selterman (@SelterMosby) is a psychology lecturer at the University of Maryland. Earlier this summer he gave his students an extra credit question that made them select between direct self-interest or indirect self-interest. The question is below:
“Here you have the opportunity to earn some extra credit on your final paper grade. Select whether you want 2 points or 6 points added to your final paper grade. But, there’s a small catch. If more than 10% of the class selects 6 points, then no one gets any points. Your responses will be anonymous to the rest of the class, only I will see the responses.”
Essentially students were asked many questions in this portion of the test. First and foremost, was it in your own best interest? Second, do you think the other students believe it is in their own best interest? Third, how confident are you in getting a good grade on this paper?
People ask me why I believe so passionately that equity compensation can be a great tool for company success. The professor’s extra credit question gets to a core piece of my argument for employee ownership and shared pay through equity.
I should mention that more than 10% of the students chose the 6-point option. Therefore, no one received any extra points. The question, “what was in their own best interest”, was answered by too many students, as, “I NEED MORE POINTS.” The question “was it in the other students’ best interests”, seemed to be answered either “I don’t care” or “They are all going to choose the guarantee so I will be just fine with the 6-point answer.” The response to the third and pivotal question regarding confidence in getting a good grade should not be too surprising. I can’t remember a test where at least 10% of the people were concerned with their performance. Tests, unlike musical performances, cannot be practiced for in a specific manner. And, unlike art shows, they are not usually judged subjectively. This means that even the best preparation can leave you feeling like you may have missed something.
Increases based on performance reviews can feel like this. Many people are unsure that they have done enough of the right things during the review period. The review at the end seems to cover some things in detail and skip other things entirely. The various people administrating the test focus on different things at different times. It can be difficult to be confident that anyone is working in your best interest. Or, more importantly, that everyone is working in everyone’s self-interest.
Equity compensation can help modulate this problem. Of course, it must be done right. Grant sizes cannot seem random. Prices at the time of grant must be accounted for when determining grant sizes. Equity done properly is a way to ensure that when some people win, lots of people win. Getting equity compensation right is not the easiest task compensation professionals face. In fact, it can be pretty darned hard!
However, hard is not a good enough reason to shy away from something. If it was, none of us would be doing compensation at all. Imagine if you worked at company where everyone chose the 2 point option above. What if everyone knew that nearly all of his or her coworkers would also choose the 2 point option since everyone was working toward the same goal. And, how great would it be if people were informed and understood their impact in a way that gave them confidence in their own achievements.
There have many times I have worked with companies who have accomplished this. Ask yourself whether your employees would get any extra credit if they were asked the 2 point/6 point question about their jobs. If you think they would end up getting nothing, you may need a new approach.
Dan Walter is the President and CEO of Performensation and is committed to aligning pay with company strategy and culture. If you want to know more about Performance-Base Equity Compensation grab a copy of Dan’s new comprehensive issue brief. Dan has also contributed to “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. And if you’re still not sick of Dan, he has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.