Compensation conflict: Is there a better way?


gostickmanIn business (and marketing), we have two compensation models, with variations. Are we paid by the hour, or by percentage?  Is our overall compensation fixed, or variable?

These basic variations have plenty of nuances to keep things interesting. Say, you are bidding a fixed price contract through a competitive bidding process. You (if the opportunity is advertised by the client widely enough), don’t need to spend any money to discover the opportunity, but you certainly have cash and time costs to respond to it. If you win the job, you might lose, if you make mistakes and estimate incorrectly. Your price is fixed, after all. But is it? Possibly, if you were smart, you saw potential conflicts in the design that would make change orders inevitable — and here, subject to the contract wording, the costs switch to variable, with the opportunity for a really good mark-up (if the client won’t dispute the change orders and you don’t need to see lawyers.)

Lawyers, of course, often charge hourly rates (variable) or contingency fee percentages (also variable, but you don’t pay until the lawyer is paid.) The lawyer, if smart, will take only risks where the reward is potentially much higher than the regular variable hourly rate.

Salespeople work on fixed salaries, pure commission, or some combination, and each model has advantages and disadvantages. You can quite easily end up with the worst  or the best of all worlds with the variations and combinations. For example, if you have a really good salesperson happy with a fixed salary, you’ll make a fortune in saved commission costs. Of course, if you pay both salary and commission, you may pay top dollar for successful representation, and even higher sums for salespeople who cannot sell, but still draw their salaries.

You can, I’m sure, see the other variations here. Sometimes norms are codified into industry standards, but even these can vary regionally. In some cities, the normal commission rate for a Realtor is five or six per cent. I recently discovered in another city that the rate is 7 per cent for the first $100,000 and 2 per cent for everything else. (This to me seems to be a much more reasonable fee, especially in a city where houses routinely sell for $1 million or more.)

Marketers, of course, charge by the hour, percentage, or set a fixed price for specific services (advertising rates). Google disrupted everything with its real-time auction system for keyword advertising; modified with time because, unchecked, the system could be gamed or abused. (Yes, even a straightforward auction can be “cheated” with some resourcefulness.)

Not surprisingly, one of the biggest sources of conflict — and mistrust — in business is when purchasers and vendors do not agree on compensation fairness. At the worst extremes, the purchasers may perceive they are gouged. How would you feel if the real estate agent takes full commission on a fast, full-price listing sale, when the Realtor priced the property artificially low and had a ready-to-go purchaser in the pocket?  Conversely, you can be frustrated by add-on and extra charges, especially when you aren’t expecting them.

Sometimes market opportunities occur when you can disrupt traditional compensation practices, though of course, you need to be careful. Anything that trims your margin (income) to make the sale could come back and haunt you. I don’t think anyone wants to work at a loss, or for an income that is barely above poverty level.

In the end, of course, our compensation ultimately depends on our own abilities and the trust we achieve (through marketing and performance) to earn it. We might foolishly accept below-reasonable compensation, or in some cases get away with unfairly high reward for our work (allowing of course for the variables of risk and market conditions).

All I ask you to do here is to test your assumptions and the norms. You may discover business and marketing insights in the process.

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