Entrepreneurs are a unique bunch. They are right-brained, creative, idea-a-minute, kind of people who are brimming with passion and drive. This is great of course, except for one thing… They expect everyone around them to be exactly like they are, and they are confused and frustrated when they are not. This causes them to be constantly on the lookout for a “magic wand” they can use to rectify this. Often, this wand takes the shape of a shiny new compensation plan. The idea being, that the right plan will create the right behavior.
It all sounds like a great idea, but here’s the problem. If all you are offering is money, people will eventually default to their previous behaviour patterns. Sure, you can use money to shape behavior for a period of time, but not forever. That isn’t to say that compensation isn’t important. It is critical. But as long as you’re paying your people fairly, it’s just not the place to start.
Before you implement a new compensation plan, do everything in your power to find the right people, build an amazing corporate culture, and give them all the training, tools, and support they need to do a great job. Once you’ve done that, it’s finally time to focus on your compensation plan.
A great plan starts with a great strategy. Start by thinking about what type of behaviours you are trying to reward. You can easily trade dollars for hours with an employee, but then that’s all you’ll get in return. What you want is for your people to contribute at the highest level, so ask yourself, what kind of compensation structure would support this in your organization?
In How to Keep Your Top Talent, Harvard Business Review contributors Jean Martin and Conrad Schmidt remind us that “An employee’s rewards should be in line with his or her contributions. If you’re treating everyone equally, you're not doing enough to support and keep the people who matter most.”
For starters, you can opt to pay your employees fixed or variable wages, or a combination of the two. Fixed wages and the benefits that go with them remain the same from month to month.
Variable pay refers to compensation that is based on performance and it has a lot of perks, including:
Reducing costs associated with poor performance
Assisting with talent retention
Connecting work directly with company goals
Fostering creative solutions
Supporting a culture of continuous improvement
In order for variable pay systems to be effective they must be realistic, valued by your employees, and encourage a corporate culture that will foster your strategic objectives.
SKC Based Compensation Systems (Skills, Knowledge, and Competency) compensate employees for the skills they have. Soft skills like time management, hard skills like languages, and degrees, training, and certification all come into play. You can base your compensation strategy on the core values of your business, the roles your employees fill, or their certifiable skills–whatever you value most.
Incentive-based Compensation Systems reward specified results within shorter time frames, typically a year or less. These short-term objectives tie into your company’s long-range goals, and must be measurable to produce useful results. A gift card, trip, or bonus to reward the month’s top salesperson is a great example.
Profit Sharing plans pay employees based on your company’s profitability in addition to your employee’s regular salary and bonuses.
Gain Sharing organizes employees into groups to discuss operational changes that will increase revenue or decrease costs, resulting in gains for the business. These think-tanks meet on a regular basis to continually improve systems and share in the revenue saved or generated.
Ownership and Stock Options encourage employees to behave more strategically. When employees reap the benefits of the company’s long-term success, they tend to work and think like owners, and that is the direction you want to be heading!
4 basic steps to designing a successful compensation strategy:
Know where you want to go. Begin with the end in mind. What is it you are actually hoping to achieve? Are you attempting to attract only the best and brightest new college grads over the next year or are you looking to hire twenty seasonal warehouse employees for the night shift by the end of the week? Know your objectives and work towards that end. A great compensation system is derived from a plan and a purpose.
Know where you’re at. Understand your current state and environment, and how you got there. Is it based on tradition, market trends, or simply happenstance? Be realistic about the benefits and drawbacks of your present compensation system and ask your top-level managers and employees for their input.
Know the players. Do you have the right people in the right positions? Does every single employee on your payroll belong there? Are your key roles filled with exceptional top talent? Do you know what motivates them and how to retain them? If you don’t, there’s no time like the present to start asking questions.
Know what you’ve got to work with. Define the compensation tools available to you, and establish how to use the best methods to your mutual advantage. Will your employees receive a fixed wage, a variable wage (such as a sales commission) or a combination of the two? Will your incentives be based on team or individual performance? Do you want to reward skills, knowledge, and competencies above loyalty and tenure?
Stop thinking of compensation as a burden. Here are 8 ways your compensation system can work for you:
Pay for value, productivity, or quality as opposed to time whenever possible. It’s what an employee does with the time that is important. Basic hourly rates with no room to reward excellence are not motivating to top talent.
Tie pay rate to skills rather than position whenever possible. When employees are motivated to improve their skills, everyone wins.
Tie variable pay to individual and team or overall company performance. It is important for your employees to identify with the growth of the department or organization as a whole, not just their own performance.
Design a clear and concise compensation plan that is easy to understand. When employees see a direct correlation between their efforts and the success of the company, they know exactly what success looks like.
Provide regular feedback, instill measurable KPIs, and let individuals and teams know how they are doing on a regular basis. It gives employees the opportunity to ramp up efforts on their own if they are falling short in any areas.
Reinforce excellence by giving any incentives, bonuses, or raises in a timely manner. Behavior tends to be repeated (and emulated) if it is rewarded quickly, but something gets ‘lost in translation’ if too much time has elapsed. A predictable annual bonus is ‘too general’ to have any real meaning and comes to be expected for no real return on investment. Instead, tie that bonus to excellence for results that will knock your socks off.
Make sure your top talent knows their value to the company. Show them–not just by the zeros on their paycheck, but by non-monetary rewards as well, and by recognition, both private and public.
Remind your employees that benefits are wage alternatives. It can be easy for employees to take the added financial value of medical, dental, and child-care benefits for granted. Have comprehensive benefits in place, and ensure your team remembers and recognizes their value when it comes to compensation.
Your compensation system is part of your brand and should reflect your corporate culture at every turn. No matter what combination of compensation strategies you use, ensure that every dollar you spend on compensation has a purpose and drives your business continually forward.