The Mario Meeting

Review season. You start your career thinking the review is the most important milestone of the year, but as an individual, you only see part of the picture.

Everyone cares about the compensation (base salary, bonus, and stock). That’s the data they care about, but where did this pile of compensation come from? Who decided how big it is? And how is it allocated? It is a long, complicated, and large process that began over a year ago.

And as a Senior Leader, it’s your job to figure it out.

The Most Important Milestone

I’m going to work backward because we’re all — correctly — focused on compensation. Before I do, one thing to hold onto, because it’s the thing that trips everyone up: in any given Summer, two budgets are moving at once. One is being spent — the money for this year’s raises, which was locked in a year ago. The other is being built — next year’s budget, which is just now getting decided in rooms most people never see. Keep those two apart in your head, and the rest of this article is more digestible.

Disclaimer: This article makes a lot of assumptions, which I’ll explain as I go. The first is that you work in a business that is doing well enough to afford a merit budget for the team. No merit budget? Probably no promotions and likely no raises. Reading this article is still worth your while.

Fall. Reviews. Critical milestone. You receive a letter that says some words and then has some numbers. Hopefully, your boss explains these words and these numbers and gives you context on what they mean relative to your performance. I have found that the number of words I’ve received as a Senior Leader has gone down as a function of seniority. The number usually goes up. Usually. Why the Fall? It’s the last moment the company can pay out against a budget it defined a year ago, before the next fiscal year begins.

Earlier that Summer. Another critical milestone/meeting. Talent Planning. Before the review is written, the Senior Leaders for a team gather together and debate some version of ratings. There are many variants of these ratings for each company, but the punch line is that for each level (basically senior, mid, and junior), an employee is put in one of four performance buckets:

Exceptional

Strong

Fine

Needs Work

Worth repeating now, because it matters later: the money you’re allocating in this room was decided roughly a year ago. You are dividing up a pile whose size is already fixed.

If you’ve had the opportunity to be in one of these meetings in your career, you realize the intense hand-waving I’m doing with these four bullets. Get used to it. I’ve run eight versions of this process over the last 30 years, and I’m providing a high-level description without many details. However, the principles behind this process are the same.

Sidebar: If you haven’t had one of these meetings, I wonder why. How are you calibrating your ratings with your peers? How are you making sure your ratings are fair? Good questions that deserve answers.

Back to the meeting. The tricky part of this Talent Planning process is the constraints:

For a given team, there is a limit on how many individuals can go in each bucket, and

For a given rating bucket, there is a limit (usually a range) on how much comp can be allocated to an individual.

These counts and ranges vary by level. More junior folks can receive higher ratings. The higher the level, the higher the compensation range. If it’s not obvious yet, these restrictions exist for two reasons:

By restricting how many humans can go in each bucket, the company enforces a curve for ratings.1

When you add compensation ranges to all of it, you have all the pieces in place for a budget. X humans at Y compensation equals the total budget for raises.

These restrictions exist because every manager believes their team is doing better than other teams. This is normal human behavior; they better understand the data in front of them than the abstract data sitting in someone else’s head.

Psychologists call this the Lake Wobegon effect, named for the fictional town where all the children are above average. Your team’s work is vivid because you’re standing next to it; everyone else’s is a bullet on a slide. It’s not a lie — it’s a bias, and it’s why this meeting requires you to prove it.

However, without a mechanism that requires managers to defend their ratings, you get unbridled compensation and title bloat. That’s a future article.

Also, promotions are usually a part of this whole process. Some companies keep the promotion budget separate, but for the sake of simplicity, I’m tossing promotions into this Talent Planning process.

The Talent Planning process is essential. If you’re throwing promotions into the mix, you’re defining critical growth narratives for your most productive employees while also having honest debates about the unproductive ones. This article is not where I’m going to talk about how to do this well, when to debate, and when not to debate, or whether this process is fair or not. This is where I am looking at you, Mario. Yes, you. You and I have been Senior Directors on this team for three years, and every year, you think this is the meeting where we can argue for more dollars. I respect the moxie, but, Mario, this is not a budget meeting.

Your team, your organization, or your company carefully sets aside a chunk of money for compensation and promotions, and your job is to fit your plans for your team against this budget. Mario, yes, sometimes we pushed and discovered that the CFO or the VP had squirreled away dollars for the inevitable “We need more” conversations, but these were saved for one-off special circumstances. Our job is to hit our number.

Mario, do you want to affect this number? Good, wait just a few weeks.

Meanwhile Next Year is Already Happening

Everything up to this point — Reviews, Talent Planning, all of Mario’s arguing — has been about spending a budget that was set a year ago. Now turn around. Because in that very same July, while you’re sweating the ratings, a completely different set of meetings has already started: the ones that build next year’s budget. Same month. Different money. This is the cycle Mario never shows up for.

To vastly oversimplify even more, the process goes like this:

Strategy meetings — What are our big swings for the next year (or many years)? Product-wise. This often shows initially as themes or ideas from the CEO or VP of Product, and it’s designed to get a conversation started.

Product planning meetings — From that initial list of dreams, we (Product, Design, Engineering) start to build a defined set of concrete ideas that we could build. These are still scribbles, but on this long list of scribbles is the set of products and features the team is going to build in the next year.

Finance meetings — Once features start showing up, that’s when it’s time to get really uncomfortable. Important people are going to start asking hard questions about how much money it’s going to require to purchase that hardware or how many engineers will be required to staff that new feature or technology. If you’ve never done this before, my first bit of advice is: get comfortable with swags. While there are real dollars being decided here, you do not have the time to develop data-justified cost and headcount estimates. You are going to make well-informed guesses that have a significant impact on your team.

The cascade continues like this:

Finance looks at the possible features and the costs and builds a forecast on how these new features could affect the business. They bolt that onto how the business is currently doing and start to make estimates on how much money can be spent on the various parts of the business.

Quite often, the CEO creates working groups whose job it is to figure out different parts of the business. One of these working groups is the Compensation Committee, and its job is to figure out how much money the company can use in the next year for the merit budget based on finance guidance. They do a lot of research on hiring trends across the industry, promotion rates, and attrition rates, and then propose a number — “a 3.5% merit budget,” which means the budget is 3.5% of the total compensation of the current set of employees.

Every meeting I just described happens months before anyone writes a review. And the person whose budget depends on them wasn’t in the room.

Now Even Simpler

What’s my problem with Mario? He and I have been through this process three times now, and he still hasn’t figured out that the time to argue for more budget for his team has long passed. It’s not during Talent Planning; it’s during those Product Planning meetings he hasn’t shown up at for the last two years. His thought: I’m not a product guy — just tell me what you want me to build.

The wheels that are set in motion during Planning Meetings will define the budget that your team will be held to for the entire year. Chances are, they will never see a budget spreadsheet, but they will certainly feel the consequences of a budget where you did not successfully argue for headcount growth by drawing a clear line from strategy to product to features to the additional resources your team needs to get the job done in the coming year.

Arguing for a budget during a Talent Planning meeting demonstrates a profound lack of understanding of how business works. It’s all connected and, in business, it’s usually defined by money.

But that still isn’t my issue with Mario.

Has this article confused you? Is it completely clear how all compensation decisions are made? Probably not, but it gets worse. This is a model inspired by a consumer software company that ships annual releases — and you… work somewhere else. With an entirely different process.

And, as a Senior Leader, no one is going to take the time to explain all of this to you.

They are assuming you will take the time to figure out how the system works.

I’m looking at you, Mario.

Yes, a curve. Yes, your boss lied to you when you asked if there was a curve, and he talked for a while about fairness, but there’s a curve. Always.