Lee Carter and her husband, Jack Schiffer, became two of Waterway Industries' most valuable managers almost by accident. But now, if the snatch of conversation CEO Cyrus Maher just overheard on his way to get coffee meant what he thought it did, he was in danger of losing the very people who’d contributed most to Waterway’s recent growth surge.

Cyrus had met Lee and Jack, both paddling enthusiasts, when he was an advisor to a university outing club. Lee had been majoring in marketing at the time, while Jack was studying engineering. He took a liking to the young couple and offered them part-time work at Waterways, then a small manufacturer of high-quality canoes in upstate New York. After graduation, the newlyweds decided to stay on full-time and take a breather before launching their demanding professional careers. That was 10 years ago.

When Lee and Jack joined Waterway, they found a laidback atmosphere. Even as Waterway had grown steadily over the years, it continued to attract shopfloor employees who loved water sports and enjoyed making quality products they themselves used in their off-hours. Workers spent time good-naturedly horsing around with each other, but they got their work done on time. In fact, on nice days, they often completed their tasks early so they could leave by mid-afternoon and get some canoeing in before dark.

In late 2003, Lee took a hard look at the slowing demand for canoes and the rapidly growing kayak market. “Cyrus,” she asked, “have you ever thought about making kayaks?” Intrigued, Cyrus gave Lee and Jack the go-ahead to see what they could do. Jack responded by designing a compact, inexpensive, lightweight kayak that immediately found favor among baby boomers looking for a way to have some fun. Lee established a formal marketing department to drive sales. That’s when things really took off. Many Waterway canoe customers placed sizable kayak orders, and a number of private labels asked Cyrus to make kayaks for their companies.

Energized by their success, Cyrus, Lee, Jack (who’d recently been named design department head), and other Waterway managers developed a long-range strategic plan that called for aggressive growth, new product designs, and nationwide marketing and distribution by 2008. These ambitious plans resulted in an increased workload and a faster-paced work environment. Waterway managers provided employees with across-the-board pay raises. In Cyrus’s opinion, the pay increases were more than reasonable, but lately, he has heard complaints, both from the shop floor and from managers. He is dealing with compensation issues the way he always has—on a case-by-case basis. When a plant manager suggested top hourly performers receive additional wage increases, Cyrus turned it down, contending that Waterway’s wages were in line with other manufacturers in rural New York. Shortly afterward, a new automotive parts plant offering a slightly higher wage lured away three of Waterway’s best workers.

When the company’s CFO threatened to leave unless his compensation package included profit-sharing, Cyrus appeased him with a pay increase and extra vacation. But Lee and Jack have been more insistent. What they feel they deserve, in view of their contribution to the company’s growth, is a share in the profits. He turned them down, and now, if he heard correctly, they are considering a lucrative job offer from a competing company. What should the CEO do? He sees Lee and Jack’s point of view but would the other managers understand if he granted the couple the part ownership in the company he’d denied the others? And how would the hourly workers react?

Specifically, how would you gather the data and design a competitive compensation system for Waterway? Would your approach be different for hourly workers versus managers? Would you treat all managers equally?