Guidelines to Consider When Designing Your Compensation Systems
Whenever possible, pay for value, productivity, or quality instead of time. It’s what an employee contributes to an organization that's important. It doesn’t make sense to pay the same amount to an employee who barely gets the job done, as you do to someone who goes beyond the call of duty. It sends a message to your staff that they are little more than cogs in a machine. It’s demotivating to those who would like to do a better job. Of course, there are other ways to let employees know they’ve done an exceptional job. Money is not the only motivating factor in life, nor is it always the most important, but if you want your employees to truly buy into the goal of maximizing profits, you’ve got to put your money where your mouth is.
When setting an individual’s fixed or base rate of pay, tie it to their skills rather than to their position. Make a list of essential and beneficial skills including levels of proficiency. Compensation can then be set using a formula that reflects the employees’ ranking on this list. This will give your employees an incentive to improve their performance. Your ‘circles of authority’ can be useful here.
Tie variable pay to individual performance as well as to overall company or team performance. It’s important to reward your employees for a job well done, but you want your employees to identify with the growth of the company as a whole, not just their own performance.
Provide employees with regular feedback so they can monitor their performance. Let them know how well they are doing, how well their department or team is doing, and how well the company is doing.
Make sure your compensation plan is easily understood. Employees must clearly understand how and why their efforts are rewarded. This will help them to feel a direct relationship between their work and the success of the organization.
Make sure your employees understand the true value of their work to the company. If they feel disconnected they'll be less willing to go the extra mile should the company go through difficult times.
Reinforce outstanding behaviour by giving incentives, bonuses and raises as soon as possible following the work. An annual bonus is usually too far removed from the outstanding behaviour to have much of an effect. The bonus will still be appreciated, but the moment,and the organic association between the behaviour and the bonus is gone.
Make employees aware of the financial value of benefits such as medical or dental plans. List them in their Employee Manuals and anywhere else appropriate. You can even print their value on your employees’ pay stubs.
Now begin the process of developing Compensation Systems that work for your company; systems that encourage the results you are looking for. No one way is best for every company. You’ll likely even need some distinctions between departments or position categories. Set up a pay systems that take into consideration the various nuances of your particular business.
|Position||Fixed or Base Pay||Variable Pay||Bonus Pay||Benefits|
|Clerk||$12/hour||1.5% gross scale||up to $1/hour||Medical|
If you currently have employees receiving fixed wages and would like to make some portion of their salaries variable, involve them in the discussion before the changes take place. In the end, it’s your decision, but there's no need to rush into a change. Your employees must clearly understand the new compensation plan or it won’t have the desired effect.
In this chapter you should have designed, shared, and made a plan to review your:
- KPIs that measure productivity in your business.
- Employee Recognition System.
- Compensation Strategy.
- Compensation Systems.