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One solution is to establish a direct connection between work and financial compensation. Ideally, compensation should reflect group or corporate success as well as personal contribution. Many companies do this to some extent with their sales force by putting them on commission, or with their managers by offering stock options. But ideally, everyone should have the opportunity to reap the rewards of a job well done. When compensation is based strictly on tenure or position, you ignore a powerful tool for positive reinforcement.

Some people will tell you that money is not the major factor concerning employee satisfaction. They will tell you that a respectful and positive work environment is more important, and to a large extent, that's true. You can’t just throw money at people and think it buys you the right to treat them poorly, but consider this perspective.

When an employee does work for you, it’s a transaction just like the ones you have with the customers of your business, only in reverse. You are the customer buying the services of your employees. If you believe that your customers should pay a fair price for your product or service, then you should do the same for your employees. A fair transaction demands that you pay more for a better product and less for a worse product, so if your employees deserve a raise or a bonus, give them one. If they don’t, then don’t. Tenure really has very little to do with it. Value has everything to do with it. Dedicated, hardworking employees are your best investment and your most important asset, so pay them fairly, treat them with respect and expect a great deal in return.

Before you begin this process take a serious look at your current employee roster, and make sure you have as many of the right people in the right positions as possible. Hopefully you have been through this process already, as you went through the Human Resources section previously. If you have people in the wrong positions, or perhaps even people who don't belong in your organization at all, deal with them first. Keeping them will frustrate your top performers and invalidate any system you implement.

Your Compensation Strategy should accomplish the following:

  1. It allows you to compensate your people in a manner that's consistent with your mission, vision and values. This will reinforce and help build the culture your business needs to grow.
  2. It defines the key personnel elements that create competitive advantage.
  3. It acts as a guide for your managers.
  4. It reflects and complements employee behaviour.
  5. It gives you a competitive advantage by attracting and retaining high-level employees that fit with your company.

Compensation Strategies vary from business to business. There's no exact formula for what is right for your particular business. Depending on factors that exist outside your business (such as the industry’s tradition of compensation or labor market conditions) as well as factors that exist inside your business (such as transition in organizational structure or development of a new sales force strategy), your Compensation Strategy will include different forms of compensation, recruitment and employee appraisal.

Compensation Basics

There are three basic ways to financially compensate an employee.

  1. Fixed wages - Wages that remain consistent from pay period to pay period. This includes employment benefits.

  2. Variable wages - Wages that vary from pay period to pay period based on some predetermined criteria. This includes bonuses, profit sharing and gainsharing programs, as well as commissions.

  3. A combination of the two - A fixed base pay with some sort of variable bonus structure.

How do you see your compensation program working in your company? What behaviors do you wish your Compensation System to reinforce? How will your employees be compensated in comparison with other businesses in your industry? Will employees know what others are earning? Should your employees have input into the design of your compensation system?

Think about your current pay system and the impact it has on your employees. How does it reflect the productivity of your staff? Does it adequately promote the type of work environment you want? Does it support your corporate culture?


ROI on Compensation

When designing a Compensation Strategy, compensation must be framed in terms of strategic investment and not a business operating expense. A compensation system, like all investments, must return a value that exceeds its cost outlay.

Just like any other expense you encounter in your business, the cost of compensation must produce a positive return both internally (called “iROI”) and externally (“eROI”).

Internally, the cost of delivering compensation must not exceed the compensation delivered; the relationship between the organization and the individual must be mutually advantageous financially.

Additionally, a business should not implement a compensation system or policy that has a cost greater than additional or bonus pay, creating an overall incremental loss.

While the above guidelines may seem straight forward, they emphasize the fact that compensation systems must be analyzed in detail, especially their cost in terms of using the company’s resources. Some costs that are commonly overlooked include:

  • The hours of accounting staff used to administer a compensation system.
  • The extra cost of accounting services related to compensation systems.
  • The hours of office staff to actually distribute compensation to employees, etc.

For the external costs of compensation systems, one guideline is that a new compensation system should produce a level and type of ROI that is expected by the business and its owners. This concept seems obvious, but there are many examples of compensation plans created by management that have failed to provide not only a significant impact on the business’ bottom line, but also failed to capture the type of return a business was targeting. For example, a new compensation plan may increase sales in an existing geographic market (and therefore improve the business’ bottom line) but fail to encourage the sales force to penetrate new geographic markets (thereby limiting the net effect on the bottom line over the long term).

A second guideline for the external costs of a compensation system is that it should be directly correlated and aligned with the desired return to the business and its owners. For example, if employee pay (based on commissions) goes up when investor return goes down then the pay structure should be revised. Again, this concept seems obvious but there are many examples when employee compensation goes up as overall business performance declines. This is especially the case when compensation systems consist of team-based incentive plans.