Gambling on Compensation

Want to make the minimum wage yet still gross almost $100,000 a year? Be a dealer in casino in Las Vegas. Want to make a little more than half that amount? Be their supervisor.

Wynn Las Vegas Resort
Wynn Las Vegas Resort

That’s right, even though the minimum wage in Nevada is just $6.15 an hour, because of tips many dealers make nearly six figures. Their supervisors, the pit bosses, however are salaried and make around $60,000 a year, with no tip sharing. This inequity makes it hard to convince talented people to leave the table and become a supervisor, with all the challenges that position entails.

Recently, Steve Wynn decided to make a change at his Las Vegas Resort. Experiencing trouble getting supervisors for his 580 dealers, he added he pit bosses to the tip pool. This earned him the ire of the dealers, who worried about dilution of the tips and the honesty of the tip counting process which they had long controlled. It was bad enough that, years ago, the tip process had been formalized so that it was taxable income. But it came to a head when a generous winner spread out almost $500,000 in tips in a single flurry. Adding the bosses to the pool diluted the shares by more than 10% and created quite a fuss.

Never make your compensation system dependent on variables that you do not control

This experience points out one of my most important rules: never make your compensation system dependent on variables that you do not control. I have learned this one the hard way, and spent one of the most challenging years of my career trying to fix just such a system.

Microsoft was one of the first tech companies to spread stock options well down into the organization, essentially to all employees. This had the wonderful effect of letting a very broad range of people share in the ride when the stock was on its incessant rise to the stratosphere, and minted numerous millionaires. The excitement at the company in the late 1990s was palpable. There is little doubt that the company benefited by paying low base wages and letting this “free” compensation provide the rest.

But of course, there were downsides. The signs were there, even when the stock was on the rise. People paid constant attention to the stock price. There were people spending their evenings writing desktop stock tickers, and mounting led stock tickers in the hallways. And the pressure to constantly split the stock (which seemed to spur further rises) was enormous. It was all people talked about for weeks at a time approaching a split.

And obviously, the ride was destined to end. The company simply couldn’t double in market capitalization every few months without eventually being the equivalent of the GNP of an entire continent. It just had to stop. Steve Ballmer (Microsoft’s CEO) was well aware of this, and that when it did stop, it was going to be ugly. Without a constantly rising stock price, the entire compensation scheme would collapse.

Our compensation plan was at the mercy of NASDAQ

As VP of HR for the company, I used to say that our compensation plan was at the mercy of NASDAQ. I spent the entire last year of my tenure at Microsoft reconstructing the compensation plan for all 35,000 employees to be less dependent on stock options. And my successors (there have been three) have spent their tenures furthering the effort. Given the exodus of key people over the last several years, their job is not complete.

Back to Las Vegas, you can see that having the casino workers’ pay being largely based on tips is dangerous. Not only do you run into the inequity issues, but the compensation plan is in control of others whose motives may not match those of the organization. Yes, people tip when they are happy customers, but they also only tip when they win (which doesn’t help the organization), or when they are drunk, or simply when they feel like it. And if their economic prospects go down, so do their tips. Is this variability good for the employees?

Wynn swung the pendulum in the wrong direction

Clearly, Mr. Wynn swung the pendulum in the wrong direction. Rather than adding the bosses to the tip plan, he should have crafted a compensation plan for the bosses that derived less from the tips, but on broader organizational objectives. Some ideas may be to base it on measured customer satisfaction, personal job performance, or even profitability at some level. Most likely a simple combination of a few measures would be effective. It’s hard to say without direct input into the process. Perhaps Mr. Wynn is reading and would like me to look into it…

In any case, this is yet another example of why compensation plans must be thought through carefully. As I have said repeatedly, you get what you deserve. If you measure and reward some narrow behaviors, you will get people who respond, and even overreact, to those rewards. Be careful what you wish for, you will undoubtedly get it.