When Your Compensation System Needs a Makeover

Over at Avon Products, Executive Chairwoman Andrea Jung is stepping down earlier than expected, in a move that observers say is more than cosmetic.

According to the New York Times, “Ms. Jung’s diminished role should make it easier for her successor as chief executive, Sherilyn S. McCoy, to execute a much-needed turnaround strategy.”

Jung came on board in 1999 and enjoyed six strong years, but sales started to slacken in 2005. Now it is up to McCoy, who was named CEO in April 2012, to fix that.

So far, so good. Connie Maneaty, an analyst at BMO Capital Markets, told the Times that McCoy has already put some necessary reforms in motion, such as streamlining what was apparently a multitude of compensation plans. “When you have too many plans,” Maneaty noted, “the organization isn’t working toward a common goal.”

Sounds obvious enough, of course. But, as Peter Drucker liked to point out, compensation systems are devilishly hard to get right. “Money in any compensation system expresses the most intangible, but also the most sensitive, values and qualities,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “For this reason, there can be no truly simple or truly rational compensation system.”

A business should make sure that those who achieve the organization’s most desired results also get best rewarded. Nevertheless, Drucker admitted, “Even the best plan will still misdirect, as well as direct and encourage the wrong as well as the right behavior.”

So was Avon just wasting its time trying to fix a complicated and unfocused compensation structure? Not at all. “The preference should be for simple compensation systems rather than for complex ones,” Drucker wrote. “It should be for compensation systems that allow judgment to be used and that enable pay to be fitted to the job of the individual rather than imposing one formula on everybody.” But, he added, “I would be the last person to claim that a ‘fair,’ let alone a ‘scientific,’ system can be devised.”

What do you think makes a compensation system effective and fair?