As year-end rituals of handing out raises and bonuses near, it is important to know that it also is a time when you are framing the ethos of your business and anchoring your employees to it.

Of course, individuals are interested in how they are performing. But, their perceptions of how they are treated in relation to others stoke emotional fires. Take a look at ethologist Frans de Waal’s (pretty funny) experiment with capuchin monkeys. He shows how a satisfying reward can become a source of infuriation when it compares unfavorably.

Employees are scanning others to find out: what does one have to do in this company to succeed? Small business owners can miss this because they are on the proverbial shop floor. And managers became managers because they are there too. The frame from which everyone makes compensation decisions is: how much did an individual help ME?

This is like figuring a tip for your hairdresser. But a business is not a transaction. It is a complex system. When multiple decision-makers ask the same-framed question what’s in it for me? in order to determine compensation, it can set the business up for trouble. Heads who are aggressive or leveraged end up being the victor and to their team go the spoils, potentially leaving others resentful.

The flip side, but no less damaging, effect is groupthink. This is where everyone either agrees with the most dominant person or finds an answer to which everyone agrees for the sole sake of in-group cohesion. Whether the strongest person or the least offending idea wins, resulting decisions create a disconnect from a purposefully designed functional business.

A Semi-Fictional Scenario

Let’s say you are a partner in a small business. You and your partners have staff who report to each of you. There are also staff who work for the business at large. You and your partners think it is fair to hand out rewards evenly for each of your respective staffs. If the skills and demands vary between groups, however, you may actually create a culture of holding back. When differences are not taken into account, employees will level inequities themselves.

What about the work-for-all staff? Without a promoter, they can get passed over. But, the very opposite can happen. What if a staff person without one “master” and with few demands showed up at partners’ offices with offers to help?

On the surface this initiative seems like a wonderful thing you’d want to reward. But without some way to evaluate the work in relation to all other work, you could unwittingly sabotage your culture.

Even the most notable brain researchers admit that they are subject to thinking shortsightedness. Behavioral economist Dan Arielly did an experiment where he asked subjects to write the last two digits of their social security number on a paper. He then asked them to estimate what they’d be willing to pay for items such as chocolate or wine. What he found was that respondents’ answers correlated to the last two digits they had previously written down. Their estimates were anchored to an irrelevancy. Like all humans, it is likely that your decisions are shaped by images that are most vivid, recallable or recent.

If the general staffer, with basic skills and a scant workload, makes partners feel good around raise and bonus time, she could end up with rewards that outweigh those who have heavier workloads, higher level skills and greater responsibilities. Taken to an extreme, the general staffer could even end up with a salary so unmoored that it is twice the market rate for comparable skills.

Should a salary structure like this be discovered, you could have a mutiny. But even in secrecy, look at what happens to the unduly rewarded employee. She does not acquire higher skills because rewards don’t require it. As others exhibit more expertise, that becomes threatening. If skill becomes the criteria upon which rewards are conferred, she will lose standing. To stay on top, she has to thwart others or sabotage projects.

This is how a business becomes hobbled. That seemingly benign decision to reward a friendly helpful baseline staffer singlehandedly created a dysfunctional culture.

To Avoid Dysfunction, Have the Big Picture in Mind

  1. Anchor salaries and bonuses to the marketplace. Rewards just above market can remove money as a dissatisfier. Rewards below will make your business undesirable. Rewards way above market pave the way to corruption.
  2. Tie rewards to job descriptions. The harder the job in terms of responsibilities, loads and skills required, the higher the reward.
  3. While contribution to the bottom line can be a consideration, sole emphasis can also lead you into corruption territory. Think Wells Fargo.
  4. Reward elements of a healthy culture. Discourage exclusionary behavior and fiefdom building. Encourage cooperation and continuous improvement.
  5. Relativity counts. If one employee hits more of the above criteria than another, he gets more relative reward.

Remember: you are answering the question what do people have to do here to succeed? When the criteria is objective, relevant and even handed, your compensation structure could be revealed by WikiLeaks and you’d have nothing to be ashamed of.