Compensation Strategy
Your Compensation Strategy consists of all the systems and policies that reward your employees for their contributions to the mission, values and vision of your company. It must be perceived by your employees as something that rewards them for their time, energy, effort and loyalty – not simply as what they get in return for “punching the clock.” It must be perceived by your employees as rewarding them for their labour as well as their commitment to the continuous improvement of your company.
Think of your Compensation Strategy as the garden that your human resources can grow in. Your goal is to create a flourishing culture of continuous improvement in your HR garden. Your Compensation Strategy can be structured so it helps create that culture, and that culture is what drives your employees to act in a manner that reflects your mission, values and vision. Your Compensation Strategy in this way only indirectly drives the actions of your employees through the culture that it creates, not through a strict set of rules that must be monitored and enforced. The development and enhancement of your Corporate Culture needs to be the key focus.
If your business is improving as a direct result of the actions of your employees, the goal is to strike while the iron is hot and reward them. Make sure they experience as close to an immediate reward as possible so they have a solid and direct connection between their actions and the success of the company. This would be difficult to do on an ad hoc, random basis. Your Compensation Strategy covers the way your employees are compensated, how often and which particular types of actions are tied to it. This will include things like base salary, sales incentives, bonuses, stock options, or even club or gym memberships.
Mark is a salesman for a medical equipment company. In 2014, Mark’s sales goal that he had to reach in order to receive a bonus was an increase in all markets of 15%. After a hard year’s work, Mark managed to increase sales by 17% and was rewarded with the promised bonus. For 2015, Mark’s targets have been set higher, and he will not receive his bonus until he raises the overall sales volume by 20% for the year. This pattern has repeated over a number of years and has left Mark with the feeling that as he continually improves his performance, his company punishes him by making it more and more difficult to earn a reward. While it's important that your sales people don't become complacent and earn bonuses based on past performance, be careful to ensure your bonus structure remains a motivating tool for your employees.
Why is it important to build a strategy around compensation? Because compensation is one-half of the work relationship. Your employees are working for you not only because they love designing, building, selling, shipping, or marketing widgets; they're working for you in exchange for compensation. Hopefully, by now, you have put the right people in the right positions on the bus that is your business, and your employees really do find fulfillment in the way they spend their time every day. No matter how much they enjoy what they do, the way they're compensated has an impact on how long they'll work for you, the attitude they bring, and the quality of work they produce. For this reason, it's important you have a clear strategy for compensation that will provide your business with the quality employees it deserves.
The steps involved in designing a successful Compensation Strategy:
Begin with the end in mind - What are the objectives behind your compensation strategy? Knowing these will give you guidance as you build your strategy. It's very difficult to accomplish anything when you don't know what you're trying to accomplish.
Understand your current state - Now that you know where you want to go, have a look at where you are right now, so you can see the distance that needs to be traveled, and lay out a plan to get you there.
Understand your environment - Before you make your plan of attack, have a look at the terrain you'll be covering. This will help you understand what type of a vehicle you'll need, as well as what type of tools you will need to bring along.
Define your compensation tools - Will your employees be payed a fixed wage, a variable wage (commissions based, for example) or some kind of combination of the two? What about compensation that doesn't revolve around money? Benefits, recognition awards, etc. These can and should be compensation tools at your disposal.
Design your compensation systems - How are you going to employ the available compensation tools to the best mutual advantage? Are you going to pay for skills, knowledge and competencies, or are you going to reward loyalty and tenure? Maybe you'll devise a system that accomplishes both. Are your incentives going to be based on team or on individual performance?
Begin with the End in Mind
When you think about your compensation strategy, it's important to begin with the end in mind. Specifically, what is it you hope to achieve by having an employee compensation plan? Some businesses exist in an environment where there are plenty of workers available to do simple tasks. In those businesses, if an employee moves on, he or she can be replaced with little effort with little to no effect on the business operations.
In other businesses, one of the main challenges is finding capable employees that are ready, willing and able to do their part in propelling the business forward. In these businesses, it becomes very important to design a compensation system that will play a role in attracting and retaining top prospects.
In the space below, write down the objectives of your compensation strategy. Are you hoping to attract the brightest and best, or do you simply need to attract a certain number of warm bodies? Write it down here.
Understand Your Current State
In order for you to put together a winning strategy for getting from point A to point B, you need to have a clear understanding of Point A. Often, compensation has evolved with a company. You hired a new production worker or salesperson when you needed to, and you paid him what you had to. What many companies end up with is a disorganized and fragmented set of "unique circumstances" that need to be renegotiated from time to time as situations dictate. Compensation is too important of a subject, both to you and your employees, to let it grow without a plan and without a purpose.
How do you currently compensate your employees? Do you pay a base salary? Do you offer performance incentives? Are there other perks or benefits that you would consider to be part of the compensation package offered to your employees? Sketch out your current Compensation methods below. Right now, this may vary from department to department, or even from employee to employee.
Understand Your Current Environment
Certain compensation strategies work better in certain external environments. Some things (like the laws in your country, or whether your work force is unionized) are part of the external environment that absolutely need to be considered. Are you operating in a highly competitive market, trying to attract top talent? If so, that is an external environmental element that you'll need to consider.
What external environmental factors exist in your business that have the strongest influence on your compensation systems? List them here.
On top of the external environment, there are things that exist inside your business you'll also want to consider as you prepare your Compensation Strategy. Some things (like historical conditions, or current social political trends) are part of the environment that should also be factored. If your sales team has always been paid base salary plus commissions, it might be difficult to move to straight commissions. Other internal environmental factors include, but are not limited to, your corporate culture, business foundation (mission, values and vision) business model, market focus, core competencies (what your business does to deliver value), business growth drivers (is your business owner / employee / systems / or culture driven?), and employee groups with unique compensation requirements. This may include groups that are unique due to factors, such as the company’s focus on sales staff, or R&D.
What internal environmental factors exist in your business that have the strongest influence on your compensation systems? List them here.