June 25, 2018

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Compensation: Do You Have the Right Plan?

Personnel will drive the businesses of the next century. Primary competitive advantages will be found in personnel more than capital, current market share or any other business concept. Appropriate compensation helps motivate and encourage productivity allowing employee and employer to ‘win’. Good employees are assisted in becoming great employees and minimal employees can sometimes reach amazing levels of improvement.

Like the rat in the cage we are driven by rewards. When compensation (especially for hourly wage earners and the salaried) becomes stagnant so does worker productivity. This usually means the worker has to only meet minimum standards for job performance. Once that minimum is obtained there is little or no incentive to do better. At that point seniority not productivity becomes the key factor in compensation. By focusing on minimum standards employees usually get there and stay there.

A strong compensation plan is essential for most businesses. The following are some key points to consider when making changes in your compensation plan:

  1. Never copy a formula. The ideal plan is one designed with your business strategy in mind. Formulas must be modified to meet business needs. The only appropriate formula is the unique one that works in your business.

  2. Look at as many different plans as you can including those outside your industry. Sometimes combinations of plans make the best plans. Include your non-compensation benefits as part of the complete package.

  3. Look very hard at what makes your business go. I call these dynamics "Drivers". They are also known as Key Performance Indicators (KPI). You must first determine what ‘drives’ your business and hook your compensation plan to that.

  4. Tell your employees you are going to put a compensation plan in place with some incentives. Ask them to make suggestions of a plan they would like.

  5. Use regular business meetings to keep talking about the new plan. Meetings should be held at least once a week. Small cash or gift rewards for top performance help get the idea across.

  6. Use spreadsheets to work out the ranges of possible plans. Be certain you are basing compensation on those ‘drivers’.

  7. Be wary of straight commission. When the dangled carrot appears to be gold plated employees easily develop tunnel vision and infighting can occur.

  8. Once you have a plan a good idea is to test it backwards for several months. This will tell you how close the plan is to getting the desired result. Then test run it for several months with employees to get approval or ‘buy-in’. A poor compensation plan can cause your best employees to leave.

  9. Make certain poor performance is poorly paid and that corrective measures will be taken if performance is not improved. Establish a minimum acceptable performance level by your company and make it the low end range.

  10. Reward top performance well. Make certain the top rewards are substantial and ‘opens the eyes’ of your employees. Top performance may get 2-3 more compensation than minimal performance. Remember that top performers need less supervision and cause fewer personnel problems.

  11. Do not reward well for the average performance. ‘Skew’ rewards to top performance. The top performance parameter should be the ideal.

  12. Make sure your plan is easily measurable and trackable by both you and the employee. If a system is too complex it becomes unwieldy and difficult to manage.

  13. Examine carefully a low base salary or hourly wage with a large incentive/productivity component. If a base is too high there is little incentive to do better.

  14. Expect minimal employees to whine, complain and quit after the plan is in place.

  15. Expect more qualified and motivated applicants to become attracted to your company. Expect your better employees to stay with you longer.

The goal of a strong compensation plan is to help the employee maximize their potential and the business maximize its potential. When I’m told about minimal employees with poor productivity the first thing I ask is how are the compensated. Invariably the answer I get is straight hourly or straight salary. As long as minimal employees get well compensated for minimal productivity nothing will change except a worsening bottom line. A weak compensation plan can keep a business down; a strong compensation plan can literally jump start a business and make it soar.

-Jack Deal