Md Toy Blog

Fair compensation

Thu Aug 06 2020 00:00:00 GMT+0000 (Coordinated Universal Time)

A quick overview of strategies to measure compensation.

Measuring the ability to report

When asking employees to layout plan for a project and report what percentage has been completed, you are measuring their ability to report what has been done.

What you probably care for, is measuring what has been done.

Someone could easily trick the system and invent many tasks that don't bring any value and say, "I did 100% of this" etc. To make it look like they're the best worker and that they deserve lots of compensation.

Let's not throw everything away, reporting and making it public to the team is a good start already.

For one, you have a way to see who is reporting and who is not.

Maybe the guy who does not like to do the reporting, is also the guy who generates the most profit for the company, but that is another problem (let's hope this is not the case in general, and that if you are a good worker, then you can also do reporting properly).

And second, you have a way to let everyone know in the team who is doing what, and to enable faster/better collaboration and more transparency.

However, I would not use this alone as a basis for compensation.

Simplified trio of explanatory variables

Since it makes sense to compensate based on profit generated. How do you measure profit per person?

For example: the guy who does Ads does not necessarily sell the property, but he may bring the lead that will end up being a customer. Also, seller's ability to be convincing enough is crucial. Finally the attractiveness of the offer makes a big difference.

  1. Quality of offer : if you have the greatest quality then 2. and especially 3. are useless, you will sell anyway.
  2. Lead generation: if  you have poor 1. then you will need lots of leads to find the stupid customer with purchasing power who will buy.
  3. Selling talent: if you have poor 1. he will have to find the best tricks to sell. Poor 2. and he will have to sit all day waiting and not using his magic.

The more leads the marketing guy brings, the more chances product gets sold. Only if the offer is able to fit the lead. In a sense, the salesperson is needed only when 1. and 3. are not the best.

To get a good 1. you need to be a "monopoly" (10x value for the customer compared to competition), which you should aim at, but very few are that lucky.

Anyhow, if you can measure the quality of two in the trio, you can deduct the last one.

1. Quality of the offer

Measuring the quality of the offer is "simple": you need to assess

  • M. quality of the market: high diff of (demand - supply)
  • R. relative quality within market: number of better offers
  • P. profit margin for the company (deducting cost of sale)

M. Sized Diff demand - supply

To assess the market we should consider all the offers in general, regardless of relative position of our offer:

Quality of market ++ # offers t1 -- # offers t1
++ # offers t0 w chg: =Supl, Dem; w/o chg: =Supl, noDem w chg: -Supl, +Dem; w/o chg: -Supl, Dem
-- # offers t0 w chg: +Supl, Dem; w/o chg: +Supl, noDem w chg: =Supl, Dem ; w/o chg: =Supl, noDem
Quality of market ++ # offers t1 -- # offers t1
++ # offers t0 w chg: Big Stable Active Mkt. ; w/o chg: Dead Mkt. w chg: Restarting/SupplyShort Mkt.; w/o chg: Rising/SupplyShort Mkt.
-- # offers t0 w chg: Rising Competition Mkt.; w/o chg: Dying Mkt. w chg: Small Stable Active Mkt. ; w/o chg: Dead Mkt.

R. Relative quality of offer

If you have access to a rank of the offer at t0 and t1, use the rank relative to 1 as a measure of quality. Ex: 100 offers at t0, yours is the top 9th at t0, then you get 0.91 quality of offer at t0. Do the same at t1. And do the average giving more weight to t1.

On the other hand if you do not have clear position, you can use this rough estimates:

Relative quality of offer within ++ # HIGHER quality offers t1 -- # higher quality offers t1
++ # HIGHER quality offers t0 w chg = R--; w/o chg = R-- w chg = R+ ; w/o chg = R+
-- # higher quality offers t0 w chg = R- ; w/o chg = R- w chg = R++; w/o chg = R++
Relative quality of offer within ++ # LOWER quality offers t1 -- # lower quality offers t1
++ # LOWER quality offers t0 w chg = R- ; w/o chg = R- w chg = R++ ; w/o chg = R++
-- # lower quality offers t0 w chg = R--; w/o chg = R-- w chg = R+ ; w/o chg = R+

Combining both you get an estimate, for example: R+ & R-- would be R- which roughly means middle of lower tier offers. So relative quality of offer within market is ~0.25. If you get a R++ you can say you have a ~0.90 quality.

P. Profit margin for the company

Cost in cash flow = costs / gross margin. This allows you to know what cashflow is consumed relative to the margin. The lower the better, but we need some variable the higher the better, so we do 1 - Cost in cash flow which is:

Profit to gross margin = (gross margin - costs) / gross margin. A 0.90 gross margin means we used 10% of the expected return: a.k.a. 10x profit.

Score: Baking it together

Quality of the offer is a combination of finding a good market size and condition, a good position in that market, and being able to retain a good profit margin. That is what we should look for when prospecting for business opportunities.

Quality of the offer = R + P * M

TODO : need to find a way to size in terms of volume potential as well as actual margin size in currency. Being able to retain 100% of 10 cents in a market of 1 unit volume, should not be more glorious than retaining 80% of 1M in a market of 1 unit volume.

2. Lead generation

The quality of a lead is assessable by a selling person's dependance on the lead generation. If the salesman consistently asks for more leads coming from a specific person, it may be a good sing that the leads are being of quality.

3. Sales

Measuring sales is tricky, unless you are able to assess the quality of the other two. What is key here is to recollect as many data points as possible, specifically where the other two factors were doing poorly. And check whether the sale was still made. This allows to control for external factors other than selling talent.


All in all everyone is incentivized to be honest about the achievements of the other, because if they give themselves credit for someone else's influence, to steal the other's compensation, the latter could lower their effort/leave in order to use their time in more productive ways.

These are only thoughts nothing is definite.