Compensation Program Classification Rule
Match award design to the recipient’s legal obligation
- Difficulty
- Advanced
- Time to result
- ~weeks to results
- Steps
- 5
- Confidence
- 97%
Feinberg distinguishes compensation programs by what recipients must surrender. A program designed as an alternative to litigation must estimate each claimant’s legally recoverable damages, so earnings, life expectancy, injury, and other circumstances can produce different awards. Its purpose is to give claimants a credible alternative to suing, usually in exchange for a release. A charitable gift fund operates differently: recipients retain their right to sue and assume no obligation beyond accepting the money. In that setting, equal awards for similarly situated recipients are more defensible because the fund is expressing solidarity rather than purchasing legal finality. The mechanism therefore runs from legal obligation, to program classification, to award formula and acceptance terms.
Origin
Extracted from Masters in Business through Ken Feinberg’s comparison of the September 11, BP, GM, Boston Marathon, Sandy Hook, Aurora, and Virginia Tech programs.
Core principles
- 01Classify the program before calculating awards
- 02Tie award variation to the rights recipients surrender
- 03Use individualized damages when replacing litigation
- 04Use equal treatment when distributing unconditional gifts
- 05Make participation voluntary and terms transparent
How to run it
- 1
Define the fund’s purpose
State whether the fund is resolving legal claims, distributing charitable gifts, or serving another purpose. Do not begin with an award formula before resolving this question.
Pro tip Write the purpose in one sentence that claimants can understand.
Watch out A vague or mixed purpose creates inconsistent decisions and distrust.
- 2
Identify the recipient’s obligation
Determine whether accepting money requires a release, waiver, proof of damages, or no reciprocal action at all.
Pro tip Treat the waiver of litigation rights as the key classification signal.
Watch out Do not describe a payment as a gift if recipients must surrender legal rights.
- 3
Choose the fairness model
Use individualized economic and noneconomic calculations when the program replaces litigation. Use equal or category-based awards when it is an unconditional gift program.
Pro tip Explain why equality and individualization represent different forms of fairness.
Watch out Applying individualized earnings calculations to a gift fund can imply that some lives are morally worth more.
- 4
Make participation informed and voluntary
Let claimants see the proposed award and compare it with litigation or other options before accepting any release.
Pro tip Provide a clear acceptance period and plain-language terms.
Watch out Requiring an early waiver before disclosing the award undermines informed choice.
- 5
Prepare for comparison and criticism
Assume recipients will compare awards with those received by neighbors and peers. Publish defensible rules and apply them consistently.
Pro tip Use representative examples to show how the formula works.
Watch out Technical accuracy alone will not resolve the emotional meaning attached to different awards.
In the wild
The BP program offered claimants an award funded by the company. Claimants could inspect the amount, reject it, and continue toward litigation, or accept it within the stated period and waive their right to sue.
→ Many eligible claimants accepted compensation and signed releases, allowing large numbers of claims to be resolved without prolonged litigation.
The Boston Marathon fund distributed privately donated money without requiring recipients to waive their legal rights. Feinberg therefore used a category-based design in which similarly situated recipients received the same amount.
→ The fund delivered rapid charitable assistance while preserving recipients’ legal options.
Common mistakes
Using one formula for every fund
A formula appropriate for buying litigation finality may be inappropriate for distributing an unconditional charitable gift. Program purpose must determine the formula.
Confusing economic value with moral worth
Individualized earnings calculations can be interpreted as judgments about the value of different lives unless their narrow legal purpose is explained.
Hiding the award before the waiver
Claimants cannot make an informed voluntary decision if they must surrender legal rights before seeing the proposed compensation.
Is it for you?
Best for
It is best for governments, courts, companies, and charities designing voluntary compensation programs after widespread harm.
Not ideal for
It is not ideal for ordinary damages trials where a court independently determines liability and compensation.
From the transcript
“Those aren't alternatives to the tort system. Those are gift programs.”
“There. I design programs where one size does fit all because there's no obligation on the pot of the recipient to do anything but take…”
“If you present a number, you could take it, or you could see exactly.”
From the episode
An Interview With Ken Feinberg: Masters in Business (Audio)
Ken Feinberg