How to Make Fair Companywide Decisions

TL;DR

Evaluate every critical management decision through the eyes of the entire company, including employees who are not in the room. A choice that seems compassionate or fair to one person can create inequity, weaken authority, or establish damaging expectations for everyone else, especially when demotions, compensation, performance, and retention are involved.

Transcript

So when Sam originally sent me an email to do this course, he said Ben can you teach a 15 minute course on management. And I immediately thought to myself, wow, I just wrote a 300 page book on management, so that book was entirely too long. And I, I didn't actually have time to collapse the 300 pages into 50 minutes. So like Mark Twain, I didn't ha... Read More

Key Insights

• Critical management decisions are interpreted by the whole company, not only by the manager and the employee in the conversation. Leaders must combine the perspectives of employees inside and outside the room to anticipate side effects, organizational signals, and potentially dangerous consequences.
• Companywide perspective is difficult to maintain because leaders often make important decisions while under substantial pressure. The immediate emotional needs of the person involved can dominate the discussion, even though employees elsewhere may interpret the same choice through questions of fairness, authority, compensation, and performance.
• A demotion can appear compassionate when an executive works extremely hard, is generally smart, and is liked by colleagues but lacks the knowledge and skills required for the role. It lets the company retain the person while bringing in someone capable of addressing the business problem.
• Executive compensation can make a demotion unfair to other employees. An executive retaining 1.5% of the company after moving into a lower role may receive far more equity than engineers receiving 0.1% or 0.2%, causing employees to question what performance is required to preserve substantial rewards.
• A demoted executive can lose practical authority even when formally assigned another role. Colleagues who remember the person as head of sales may discount instructions from that person as a regional manager, particularly when ambitious employees see themselves as possible future vice presidents elsewhere.
• A personnel decision establishes a standard for what failure means inside the company. Keeping an executive after unsuccessful performance can signal that intense effort is sufficient to retain equity and employment, while termination can signal that highly compensated leadership roles require results as well as effort.
• The correct response to underperformance depends on the employee's circumstances. An externally hired executive with substantial equity presents different companywide implications from an internal employee who was promoted beyond an appropriate level and never received the same executive compensation package.
• A requested raise affects employees who remain silent as much as the employee who asks. If managers reward requests without a broader performance evaluation, other strong employees may conclude that compensation depends on asking, changing their behavior or making them consider leaving the company.

Questions & Answers

Q: How should managers make critical company decisions?

Managers should evaluate a critical decision from the perspective of the entire company, not merely from their own viewpoint or that of the employee directly involved. They should consider how absent employees will interpret the choice, what standards it establishes, and whether it creates unexpected effects involving fairness, authority, compensation, performance, or trust.

Q: Why must managers consider employees outside the room?

Employees outside the room will still observe a decision and draw conclusions about how the company operates. A private arrangement can become a public signal about who receives rewards, what happens after failure, whether effort outweighs results, and whether leaders apply standards consistently. Those interpretations can create consequences the original conversation never addressed.

Q: Should an underqualified executive be demoted or fired?

The answer depends on the broader organizational meaning of each option. A demotion may preserve a hardworking, well-liked employee, but managers must examine retained compensation, future productivity, and whether colleagues will respect the person's reduced authority. They must also consider what keeping the executive communicates about failure and the results expected from highly compensated roles.

Q: Why can demoting an executive create compensation problems?

A demoted executive may retain equity originally granted for a much larger leadership role. In the example, the former head of sales held 1.5% of the company, while engineers received 0.1% or 0.2%. Employees could reasonably question the fairness of preserving that compensation after the executive no longer performs the job for which it was granted.

Q: Why might a demoted leader lose authority?

Colleagues may continue to define the person by the failed leadership assignment. Someone previously known as the head of sales may not command the same respect after becoming a regional manager. Employees receiving instructions may focus on the demotion, question the person's judgment, or see themselves as more promising future leaders, making the new arrangement less productive.

Q: What does an executive demotion communicate about performance?

An executive demotion communicates what the company believes failure means and what an employee must do to preserve compensation and employment. Retaining someone primarily because of exceptional effort may suggest that effort is enough, even in a highly compensated role. Other employees may instead expect leaders to produce the results required by their positions.

Q: Should managers automatically give excellent employees requested raises?

Managers should not treat a requested raise solely as a private retention decision. The employee may deserve more compensation and feel appreciated after receiving it, but the manager must also consider colleagues who performed equally well or better without asking. A decision based only on the request can make compensation appear disconnected from systematic performance evaluation.

Q: How do requested raises affect employees who stay silent?

Employees who do not ask for raises may infer that requesting compensation matters more than doing excellent work. They may believe the company is not genuinely evaluating performance because one person asked and received more while others received nothing. That interpretation can pressure them to start asking despite their preferences, or make them consider quitting and going elsewhere.

Summary & Key Takeaways

• Critical management decisions affect more than the manager and the employee directly involved. Leaders must consider how every employee could interpret a choice and what broader standards it establishes. This companywide perspective is difficult under pressure, but ignoring it can produce unexpected side effects and potentially dangerous organizational consequences.

• Demoting an underqualified executive may appear kinder than firing that person, particularly when the executive works hard and is well liked. However, existing equity, reduced authority, and employee perceptions of fairness can make the arrangement unproductive. The decision also communicates whether effort or actual results determine continued rewards and status.

• Giving an excellent employee a requested raise may support retention and feel fair to both parties. Yet employees who did not ask may conclude that compensation depends on requesting it rather than performing well. Managers must therefore evaluate pay decisions as companywide signals, not merely private responses to individual requests.