Salaries and bonuses are an expense that,

• Is paid to people,
• To create enough value,
• To generate a profit.

Roman soldiers of yore were paid with sal, “salt,” and that is where the word “salary” comes from.^∇

Dividends Go Up to Owners

Capital is money that makes money. The new money is popularly called profits. Profits (i.e., really dividends) go up to the owners.

To start a business, the boss either has capital or convinces people with capital to give him some. Then a business is born. Obviously, this is all a high-level sketch of what happens, but it serves to illustrate the point that,

1. Because of their capital, investors own the business,
2. The boss is the boss thanks to capital.

With this capital, the boss now buys machinery, hires people, and he gets an office building (maybe not, post-COVID19).

See what happened here: I wrote “hires people” and you didn’t even blink. It’s the normal thing.

Ask Yourself

Here is the traditional, Fiat^∇ view,

• Capital creates jobs.
• People work at those jobs.
• Their work makes the business valuable.
• This value comes in the form of dividends for owners.
• The people who work there and created the value that commanded those dividends, they get a salary.

The question you have to ask yourself is: why don’t the workers get any of these dividends? The response might be, Well, smart businesses are generous and they earmark some of these dividends as bonuses for the workers.

Bonuses

Of course, the distribution of bonuses is never equal, because people don’t contribute equally. It is up to the boss to determine what the correct distribution should be. The problem is that the boss has only his own perspective to make that decision. Even when the lesser bosses influence the distribution, they will most likely not know all the contributions made. In any case, the bonus distribution decision is made by a handful of people.

Bonuses are always problematic. I used to think that it was because “I didn’t get enough.” Instead, it is mostly because,

• People don’t know how this distribution came about
• At one end, many people perceived it as unfair to their peers. “With all the work that she’s done…”
• At the other end, other people perceive it as generous. Unfortunately, this disrupts the feeling of belonging

Again, this is so because as fair and even handed as the bosses might be, they are not perfect and they don’t see all the contributions that are happening all around them.

The simpler alternative is not to pay a bonus. And, as your organization matures, there’s not even a need to pay salaries.

No Bonus

Instead of giving a “bonus,” set up a system that recognizes contributions, and rather than a handful of bosses, have everybody recognize contributions as they notice.

At “bonus” time, the number of recognitions, which we call RADs, determines what percentage of the bonus fund each person receives.

It is key that you make the distribution completely transparent and easily available to everybody. This way, anybody can raise questions, ask for clarification, and detect cheatin’.

What about Capital Investors?

• The “normal” split is 100% to capital investors and a small “bonus” to everybody else. This is not what we are thinking of.
• In Spain, the NER companies on average give 70% to owners and 30% to everybody else. It could be 50-50 or 30-70.
• Rather than pay capital gain “forever,” the inclusion of capital investors should have a limit. It could be time (“We will pay dividends for X years), or capped (“We will pay up to X dollars in capital gains), or a combination of both. Possibly, you can also arrange it as a changing split: 70-30, 60-40, 50-50, … .
• Eventually, the capital investors no longer participate in the RAD pool. At least, not as investors. They can get RADs for making other contributions, and would participate in the RAD pool, like everyone else.

As your organization matures and gets comfortable with the working of RADs, the next step is to reconsider salaries.

No Salaries

A “salary” is a predictable wage in exchange for doing as the boss says. You can replace it with a Predictable Recurring Income (PRI) that each person takes home.

It works like this,

• Every person determines what they need to take home every month and that becomes their PRI.
• Along with expenses and debt repayment, the sum of all PRIs determines what, for simplicity, we will call the company’s breakeven point.
• Every month, the company pays its bills and all PRIs. What’s left is distributed as Earned Dividends.
• The amount of Earned Dividends is determined according to the latest RAD Distribution (and the split with capital investors, in any).
• When revenue doesn’t go above the breakeven point, a PRI fund provides predictability. We will explain the source of this fund below—it’s not magic.

The PRI functions like a salary,

• If what you’ve earned matches your PRI, then you take that much home.
• If you earned more than your PRI, then you take home your PRI and the rest of your Earned Dividends.
• If you earned less than your PRI, you still take home the amount of money you expected, because the PRI fund makes up the difference. But, you now owe this much to the PRI fund.

An Example

• Salim earned enough and his dividends covered his full PRI (beige).
• Daliah, Alicia, and Anita earned more than their PRI and took it all home (beige and green).
• Kim and Julio earned less than their PRI, but nevertheless they took their PRI home (beige)—money flowed out (red) of the PRI fund to make up the difference. But, they now owe this much to the PRI fund.

We had a lot of back and forth over whether or not the debt to the PRI fund was personal or not. I still believe that this scales only as a personal debt and not as a shared debt.

In other than a very small group, sharing a debt would make everybody responsible for the debt accumulated by people they don’t know and they probably don’t trust. People would either be quietly bothered by it, or want to know things like, “Who is this Julio person and why is his PRI so high?” Think of what it would be like with hundreds or even thousands of people.

As a personal debt, on the other hand, everyone can figure out what works for them and decide accordingly. Maybe Julio starts high but then he brings his PRI down once he realizes that he had jacked it up out of unexamined fears. Or maybe he keeps it high because he is paying for his sister’s school and is willing to bear the debt for a while longer. No matter, he knows and he is responsible for his choices.

There are many other set ups that you can experiment with.

ENDNOTES

• See <https://www.etymonline.com/word/salary>

• Fiat means “a decree, command, order.” See, <https://www.etymonline.com/search?q=fiat>