The formulas, tricks and trade secrets of Private Equity

Salary Vs Performance

Sample Chapter

This isn’t a post about bonuses and other monetary incentives. (That’s already been done to death and we’re none the wiser.) This is a post about the psychology of salary vs performance.

Let’s start with an analogy.

Imagine you’re a rock star. You arrive at a nearby hotel with the rest of your band after headlining a concert. The hotel manager tells you there’s only one room left, and due to high demand from the concert, the last room is renting at a premium. You feel the manager is taking advantage of your fame and extorting you. But, you pay the price anyway because you have no other viable option.

So, how will you and your rock star friends treat the room, given that you feel ripped off?

Simple-minded business people think a transaction ends when the money changes hands. But, it doesn’t. If you’re paying money for a product or service, your perceived value of the transaction will shape and influence your subsequent actions. You may not trash a hotel like a rock star, but you may use the liquid soap in larger quantities, or drink from the mini-bar without paying, or take a little less care when checking out.

The same goes for employees. As an employer, it’s your choice whether you underpay, fairly pay or overpay your staff, but be aware of the consequences. Sure, they can leave if they’re not satisfied, but in private equity and many other industries, work is scarce. There are people out there that will work for a pittance for the chance to enter certain industries. And, they do. But, employers must be careful with this power.

Just as a ripped off rock star can cause calamity, a ripped off employee simply won’t provide value. For example, would you rather pay a CTO $90k to work at 20% of their capacity or $140k to work at 80% of their capacity? For some CTOs, the difference in output (from 20% versus 80% capacity) might be negligible. But for most great CTOs, the difference would reach orders of magnitude. This is the choice you’re making every time you pay a wage.

They may not even know they’re under-performing, you may not even know they’re under-performing, but it’s the risk you take. So, don’t be a manager that underestimates the influence of fair pay. Great people make great companies and great people don’t work at high capacity (or for long) on paltry pay grades. This sounds obvious, but one-dimensional managers continue not to understand the concept.

Image: The pill or the money? firm

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