An Unique Compensation System

People respond to incentives, said Steven Levitt and Stephen Dubner of Freakonomics and SuperFreakonomics. How does a company incentivize people to stay loyal and align with the company’s goals? A Chinese company figured this out. This unique system is probably worth a Harvard MBA case.

Selected employees may participate an aggressive profit-sharing program that yields, sometime, several times the base salary. This program is the goose that lays golden eggs: it keeps on paying out as long as the person stayed employed. But it is structured as an investment: employees must first put in their own money and wait for the returns to come later — typically 7 to 8 years for it to really blossom.

Predictably, new employees work their asses off to get invited to this program. In less than 10 years, they would be starting to enjoy a comfortable lifestyle. If they manage to climb the corporate ladder, they would enter the senior rank and become really wealthy. As long as they stay employed by the company, the checks keep on coming. The top executives knew that all worthy employees want the same thing: profitability for the company. Since as long as the company makes money, everyone get rich. This works beautifully.

But it smells like a ponzi scheme. In essence, the new employees’ hardwork pays for those who are already in the club. A prospect recruit faces a last fool gambit. Can he rise to the cruising level fast enough before the pyramid collapse? The current club members, usually senior with authority, have the incentive to drive new comers harder ever.

Senior outsiders find it hard to join the company. They have proven themselves elsewhere and expect to enjoy similar compensation as their peers; not waiting years for the investment to mature. Conversely, those who worked their way up would resent the new comer that has a free ride. This system, therefore, repels external senior talents.

Like a ponzi scheme, it needs a constant infusion of new blood that, in turn, needs continued growth. This will end one day. But, for now, the last fool has not arrived yet. The bust of the bubble would be someone else’s problem.