Chris Rufer Discusses Compensation

By Amy Andresen

An excerpt from Professor Gary Hamel's interview of Chris Rufer, the founder of The Morning Star Company, in which Chris describes the process through which compensation is set at The Morning Star Company.

About the Author

Amy Andresen

Amy Andresen has worked for The Morning Star Company since 2009, and began working with The Self-Management Institute soon after.  She is the editor of most of the Institute’s publications, and spends much of her time researching and writing material to support the Institute’s mission of advancing the human organization. She has a passion for linguistics and…

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    Julian Wilson

    Compensation must be market driven?
    Whose market? Tomato processing market or local JOB market for an identical job?

    You seem to be implying that you view people as a commodity, clearly you don’t, but your explanation of what you do is too over simplified.

    Economic 101 view, if I (as an individual) grow tomatoes and turn them into surplus tomato paste I can swap (barter) my surplus for other products I have a shortage of (e.g. pizza bases)- or in the case of a monetary system, I can swap my surplus tomatoes for cash and then swap that cash for…. say pizza bases.

    The total amount of cash I get for all my surplus paste may be a reflection of a)the quality(ies) of my paste, b)the availability of my paste (in space and time) and c)the price of my paste. This is a reflection of how much value ….in cash terms …my customers are happy to place on my paste; with reference to the finite amount of cash they have to provide themselves with all their needs (man shall not live by tomato paste alone).

    As a paste maker I get paid “piece work” right; well not quite.
    “Piece work” refers to an amount of money I get paid for the production of a single piece, however as a paste maker I have to do many things (plant, grow, harvest, wash, smoosh-up, season, cook, bottle, store and distribute), there’s a bunch of fixed costs and variable costs that need to be managed and these are a bit of a moving target so that makes the margin on each individual pot of paste actually quite difficult to calculate.

    But after all these things have been “sort of averaged out” and all my costs taken, I hopefully end up with some surplus cash that reflects the net value-add (VA) of my endeavours.

    The confusing thing here is that my (VA) is NOT a reflection of my aggregate costs PLUS a margin but it is the cash value placed on my paste by my customers MINUS my costs.

    Should “Brussel sprout pizzas” become “a big hit with the kids” then those Moms out there are just not going to swap much of their cash for my old fashioned tomato paste (“yuukk Ma ….tomato pizza, that’s so lame”).

    In this case, none of my activities have changed but my net VA has, that’s because my costs are the same but my customers have changed their perceived value of my tomato paste and give me less cash.

    Net VA must include a measure of the value I add to my customer not just the value I add to the tomato paste. That’s what PRICE DISCOVERY is all about.

    So, VA is not that simple and I don’t really get paid piece work, but there is a rudimentary connection.

    If I want to improve the aggregate cash surplus of my endeavours I need to increase the net VA of my paste, either by making it more appealing to my customers (so they pay or buy more) or by reducing the costs of my operation (so I get to keep more of the customers cash).

    Crucially, this takes some individual human talent on my part in the area of change- I use my curiosity, imagination, creativity, cooperation and self-discipline to affect change.

    So AT LAST I get to my point.

    What I definitely don’t want is to have my cash surplus determined by how much cash surplus OTHER paste makers (humans) generate.

    In other words, I don’t want my compensation to reflect THEIR curiosity, imagination, creativity, cooperation and self-discipline, it MUST reflect mine.
    Not only do I not want it, but it also makes no logical sense.

    Although…….. it would seem sensible if I view my contribution to the whole tomato paste supply work as a commodity, I could view myself as just another ingredient or standard device in the chain of Tomato paste activity.

    IF that were the case, I could justify a cash surplus (my compensation) that reflects only the average of what other people generate, hence my assertion that “you seem to be implying that you view people as a commodity”.

    But, in this case, there is no motivation for me to use my curiosity, imagination, creativity, cooperation and self-discipline in pursuit of my operations because my compensation is not linked to it…. and indeed, neither is it linked to the VA of my particular paste operation.

    The obvious question is… where does the actual CASH surplus (compensation) come from if it is not related to the VA that my products provide my customers?

    From where do I get the cash to compensate myself if this is not determined by my sales income (minus costs) but rather determined by the AVERAGE rate of compensation of other paste makers?

    Your compensation system cannot logically be based on this, either this is a HUGE oversimplification or a misrepresentation of what you do.

    Self-managing systems can, and do run rational compensation schemes that reflect (on average) the VA an individual contributes (look at sport professionals for example- it’s how the whole free market runs) but certainly they don’t determine the compensation of an individual sport professional by averaging the compensation of other sport professionals.

    This only happens in Cuba and North Korea. That’s not a great model to copy AND it’s costly to operate.

    You could use a brutally deterministic model (pretty popular today in traditional organisations) where compensation is determined by - 

    the number of people who want the job
    X
    the skills required to carry out the job
    X
    the unpleasantness of the job
    X
    the demand for the product/services that the job provides.

    But again, we know this tends to drive to the lowest common denominator and is also not a great model to copy AND it’s costly to operate AND it produces a negative effect upon the culture.

    Surely the goal is to nurture the curiosity, imagination, creativity, cooperation and self-discipline of each of your individuals, because it is these human traits that drive your business in the long term? And their self expression is part of the driver of growth in an individual (Autonomy, Mastery and Purpose- Dan Pink)

    Why not just link a specific individual’s compensation to the specific value that individual adds to the organisation?

    One thing you know already (and you pay accountants to work out) is the aggregate value that Morning Star adds through it operations.
    This sum must somehow relate to the contribution of each individual. The question then is how on earth could you split that big number up in a way that reflects the actual contribution of the individual (not the average)?
    Impossible or super costly?

    Well that’s how professional sports people are paid, heck that’s how the pay of the millions of individuals is determined in your city through billions of daily choices and decisions by individuals participating in a free market. That is also how you MUST compensate people in self-managing organization.

    How to make that problem neither impossible nor super costly, that’s the challenge!

    And in Morning Star, you probably have done that in a way; because your compensation teams probably bring cultural rules to bear that are superordinate to “average sector pay” in the way you describe.
    The conflict between the culture and the explicit rule is probably the underlying reason these issues get escalated.

    Good work, by the way.
    None of this is a criticism.
    Let me use the analogy; self-managing organizations are like a glass of Chardonnay, their systems can have a “black fly” land in them, the pesky fly has no bearing on the quality of the vintage.
    I’m trying to point out the fly, not criticise your Chardonnay.