wardell books

Your Compensation Systems

Now that you have a clear understanding of the purpose of your Compensation Strategy, and the environment that it exists in, it's time to look at the tools you have available to you to design your actual Compensation Systems. This will vary greatly depending on your industry and the size of your business. You may only require a single Compensation System that will guide all of the compensation relationships in your business, or you may need to build a system for any number of departments or groups of employees. Whatever this looks like for your business, you have a solid foundation to build on.

Define Your Compensation Tools

What methods do you have available to you to compensate your employees? Fixed base salaries and hourly wages may be the only compensation tools you need for your business to attract and keep the talent you need. You may find, however, that some workers perform better and create more value for your business if they're compensated in other ways. Variable compensation includes commissions, benefits, bonuses, profit sharing or gainsharing plans, even non-monetary rewards, like parking spots or public recognition for a job well done. When you stop and think about it, you'll find you have a number of tools in your compensation arsenal.

List the different tools you use to compensate your employees in the space below.

Skills, Knowledge and Competency (SKC) Based Compensation Systems

Unlike job-based pay policies that reward an employee based on the particular job they are performing, SKC-based compensation systems compensate your employees for the type of skills they have. It's usually based on hard-skills that can be certified (operating a forklift, or mastering a particular software program) but can also consist of soft skills (communication, loyalty, etc.) It can be used in tandem with a job-based pay policy, where the base salary is based on the job market (either set at average of market or slightly below, depending on labour market conditions) and the SKC-based pay is used as a complementary increase based on your employees SKCs.

When you combine the two, a competitive salary is created which also attracts highly-skilled employees. Instead of rewarding performance directly, they reward an employee’s improvement in his/her resources that enable performance. SKC-based pay systems are not complete compensation systems on their own. They don’t reward performance directly, and they have to fit with the overall pay structure and the performance incentives already provided by your company.

The organization of your SKC-based pay systems can be done in one of four ways.

  1. You could base it on the core values of your business. For instance, if the number one priority in your organization is safety, your pay structure may be organized to reflect that.

  2. You could base it on the roles your employees can fill. In this case, an employee with the ability to lead a group or manage a number of others in the group would be compensated accordingly.

  3. You could base it on the certifiable skills of your individual employees. These could be skills such as machine operation, language proficiency, computer programming abilities, graduate degrees, etc.

  4. You could base it on a combination of the three methods above. In many cases, you'll find a combined approach is appropriate. You may have leaders with different skill sets, and you may find that all factors need to be involved in organizing your pay systems.


Benefits are essentially wage alternatives. Money comes first, but benefits do have a number of advantages as a method of increasing wages.

From your employees' point of view, benefits are often not taxable, they offer something your employees might not otherwise have, and if your benefits go beyond the ordinary, they show you care. They can also provide an increase in productivity due to the decrease in stress, especially when the benefits include healthcare for family members. Done right, benefits should support your corporate culture and make your business a better place to work. From your point of view, well thought-out benefits can help make your employees happier and less likely to leave. Benefits can also sometimes cost you less than wage increases, permitting you to give your employees more, for less.

Benefits are a great opportunity for you to "think outside the box" and give your employees a story to talk about, which will enhance and entrench the value of their job in their own minds. Go ahead and get creative; offer your employees something of value that they wouldn't expect. Some ideas that we have seen include memberships to fitness centers, sports facilities and golf clubs, magazine subscriptions, or even free dry cleaning,

What are some benefits you might offer to your employees? Don’t just think of the traditional benefits, such as medical and dental plans. Get creative and come up with some original ideas.

“By providing part timers with insurance, we’ve helped bring turnover to less than 50 percent in an industry where it typically runs more than 100 percent annually. Thanks to our lower turnover, we’ve saved more in training costs than we’ve spent on insurance.”

- Howard Schultz, CEO of Starbucks Coffee Company

Variable Compensation Systems

Variable pay refers to all forms of ongoing cash compensation that's not part of the base salary and is based in some way on performance. It's a low-cost method to manage your compensation expenses. Variable pay systems are a great way to cultivate non-financial desired behaviours, like the adoption of corporate culture. You can use variable pay systems to keep your most valued employees (and prevent those employees from leaving for your competitors), by rewarding those who function in a desirable manner.

In order for variable pay systems to be effective, they must:

  • Be valued by your employees.
  • Be realistic.
  • Encourage a corporate culture that will foster your strategic objectives.

Variable pay systems:

  • Promote team building.
  • Encourage your employees to take responsibility for the outcome of their work.
  • Level the playing field between traditional hierarchies with all levels participating in and being rewarded by their work.
  • Help your employees to think and work like owners.
  • Build loyalty.
  • Create flexibility.
  • Help your employees understand your strategic objectives.
  • Support a culture of continuous improvement.
  • Boost profitability.
  • Encourage creative problem solving.

Variable pay does come with a few drawbacks, however, that should be considered before launching a new compensation system. There are administration costs to design and implement a new compensation system, especially if it becomes complex. Some businesses, like sales or manufacturing, are built for variable pay structures, because it's fairly easy to create a direct line of sight between employees actions and their outcomes. In other industries, it may be much more difficult to determine the activities or outcomes you wish to reward.

Determining which type of variable compensation system is appropriate for you largely depends on your businesses growth and performance. A company struggling to improve its financial performance should choose a plan that focuses on efforts at the lowest common denominator, such as team awards or gainsharing plans. These plans focus individuals on very clear and controllable incremental improvements. Alternatively, an organization that's not growing rapidly but is highly profitable might find cash profit sharing is the best way to maintain that position.

When designing your variable pay plan you'll want to begin with end in mind. Ask yourself what you would like out of a variable pay system.


Bonuses are typically cash incentives that thank your employees for going the extra mile. Unlike benefits, they're not given out as part of the employment package; they must be earned. They might be handed out occasionally at the discretion of the manager, or they might be regular additions to a paycheque for exceeding predefined targets.

How you do this will depend greatly on the corporate culture you're trying to reinforce.

Don’t overlook the opportunity to give out bonuses based on your employees acquiring new Skills, Knowledge, or Competencies. Because these are one-time payments, there is no recurring cost. If they're set up to encourage your employees to acquire SKCs that will increase their value and improve your business, these bonuses can have a large return. If you are looking to make a move toward SKC-based pay system, SKC bonuses can help to pave the way. This is especially true if your business operates in a highly competitive or structured or unionized labour market. If the SKCs necessary to thrive in your market are constantly changing (software development, for example) long-term forecasting can be difficult, and SKC bonuses will give your business a competitive advantage.

Use bonuses when:

  1. You want the SKCs acquired by your employees to have a direct impact on their value to your business.
  2. You want to add a reward system without wasting resources to design and implement a complex system.
  3. Your business environment demands a flexible system.
  4. You want to add a reward without disturbing your regular base pay systems.
  5. You want to try out a new reward system that you don’t have to commit to.

Don’t use bonuses if:

  1. You don’t think it will actually be an incentive to your employees.
  2. You aren’t prepared to communicate the plan clearly to your employees.
  3. You don’t think management will follow through.

Bonus plans are a form of variable compensation that recognize performance after the fact, while incentive plans recognize performance by using metrics that have been set in advance.

needle and thread

“A wage hike is very hard to take away, but bonuses and profit sharing can disappear very quickly in hard times...more people are realizing that bonuses look like raises, but really aren’t.”

- Al Bauman, Economist for US Bureau of Labor Statistics