Note that for a meritocracy to work , we must make clear judgment calls , and our decisions have to be both transparent and accepted by our team members . We have to say out loud that “ Activity A ” is more valuable than “ Activity B .” Most businesses are deathly afraid of that . It ’ s unthinkable to many CEOs that they would have to stand in front of their teams and admit business development is more valuable than operations . Yet keep in mind their compensation system already says this , and so everyone knows it . By not admitting it , the leadership creates cognitive dissonance — which eventually produces unhappiness .
Let ’ s also take the idea of free markets into account . The markets operate based on demand and supply , which is not the same as meritocracy . Football is a good example of that discrepancy . On just about any NFL team , the highest paid player is the quarterback , even though on most teams he ’ s not the best player . That ’ s because quarterbacks are scarce . Kickers aren ’ t .
This likely frustrates our notions about equality . Human beings judge their well-being and success by looking around and determining their relative status ( rather than their absolute status ). In other words , as they say in Bulgaria , “ Success is doing a bit better than your neighbor .” The desire to be equal may be deeply programmed in our nature . After all , there are well-documented experiments showing that chimpanzees and dogs revolt when two animals from the same group are given different food . Even they want to be equal . ( There ’ s a hilarious and very instructive video on the topic ; you can find it on YouTube by searching for “ monkey fairness study .”)
If you think we ’ re better than monkeys , think again . I have worked with many advisors earning more than $ 1 million a year who sulked when their partner made $ 2 million . Consider this apropos joke : A genie offers to grant an advisor a single wish , and says “ Whatever you wish for , your partner will get twice that .” The guy thinks a bit and says : “ I want to lose half my money .”
Or consider an experiment from game theory called “ the dictator game .” One person ( the dictator ) is given , say , $ 10 and has to share some of the money with the other participant in the experiment . The dictator can choose to keep all the money or share just some . But if the other person rejects the deal , they both lose the money . If he or she accepts , they both keep it . Rationally , the second player should keep whatever is offered ( even $ 1 is better than zero ). But as you might guess , the second player often rejects these “ bad offers ” if they ’ re unequal .
A fun experiment , but it brings to light stark differences among those of different genders , societies , generations and even political views . We are all universally drawn to equality .
So we should not confuse it for meritocracy , which is far from the same thing . The latter is going to open the door to unequal , perhaps very unequal , outcomes . It ’ s the reason a company ’ s CEO might make eight times more than the receptionist ( a fact , according to the advisory industry studies we conduct at our firm ).
Meritocracy has been challenged as an approach at the social level — by those who say it leads to unfair outcomes , and a poor social outcome overall . The executive ranks in our industry dismiss those complaints , but trust me , our young colleagues hear them loud and clear .
The young aren ’ t the only ones . There are others among us who also challenge meritocracy on past standards of fairness — in systems where “ paying your dues ” and “ burning the midnight oil ” or “ being here the longest ” are the grounds for a reward , not the results of someone who created something new and better .
So with these problems in mind , it ’ s time to answer some very complicated questions .
Who Should Be The Highest Paid Person In Our Firm ?
A simple question , but I bet most CEOs in our industry would be horrified to answer it in front of their teams . Should it be our best business developer ? Should it be our leader , the CEO ? Should it be the advisor who manages the most revenue ? Should it be the hardest working employee ?
Answering this question forces firms to assign value to each function . But our answers could be disheartening to many , so we prefer not to speak about it openly , even though , at the end of day , a decision still has to be made .
The question was simpler when the firms were smaller and the biggest roles were all to be found within the same person — the founder , who was also the CEO , the best business developer and the advisor with the most clients . In modern firms , however , the CEO may have just joined the firm . The best business developer , who is specializing in sales , likely doesn ’ t actually work with many clients . The advisor with the most
34 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2024 WWW . FA-MAG . COM