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WHY HAVE A COMPENSATION PLAN?
Compensation is critical to hiring and retaining key employees. Like your key customers, loyal employees are critical to your company’s success. Hence, your compensation plan is as important as your marketing plan, operations plan, and financial plan. Compensation is a critical element of your overall business plan.
Having a written compensation plan actually simplifies life. Without a plan, compensation decisions are made on an ad hoc basis and can easily become fragmented and disconnected from the company’s goals. Creating a written plan for all employees forces you to look at compensation in an integrated way. An employee handbook is a useful way to provide this information for employees.
COMPENSATION REFLECTS YOUR COMPANY’S VALUES
If you have a consistent and well-thought-out compensation plan, your company’s values and rewards will be clear to
Why Have a Compensation Plan?
the employees. If you do not develop such a plan, politics will prevail and employees will make their own inferences about company values. Worse, if you allow ad hoc compensation decisions, you may find yourself with new hires who are being paid more than long-term, highly skilled employees. This can have disastrous results, and you may find yourself defending an age-discrimination lawsuit.
I have heard many an outraged business owner complain about employees who leave to start competing firms. It is a fact of life—high-performing employees (who are poorly compensated) will leave. They will go where they will be rewarded. They will work for competitors or start competing firms unless you make staying with your company a more attractive choice. Noncompete agreements are far less effective in retaining key employees than a well-constructed compensation plan.
BASE PAY AND BENEFITS
Compensation should be designed to reward the behaviors that make the business successful. Base pay is a stated pay rate—the employee receives the same salary or the same amount per hour of work every payday. Benefits are also part of the employee’s regular compensation.
It is preferable to keep base pay to a modest level. This approach has several advantages. A lower base payroll can help you weather a slow period in business without layoffs. A lower base payroll also leaves room to reward specific employee accomplishments with a bonus or profit-sharing plan. Employees share in the upside of good times, and you reduce the downside risk of high payroll through lean times. It is much easier to cut bonuses than it is to cut base pay or lay off employees.
What Do You Currently Offer?
WHAT DO YOU CURRENTLY OFFER?
Worksheet 2.1 provides a framework for assembling information about benefits offered, compensation paid, and results achieved. It is a framework for integrating the components of the compensation plan and making informed business decisions.
Worksheet 2.1 Current Compensation and Benefits Summary
Employer Employee Cost/ Benefits Summary Cost Participation %
Medical ____________ ______________ __________________
Dental ____________ ______________ __________________
Life ____________ ______________ __________________
Disability ____________ ______________ __________________
Paid time off
Vacation ____________ _____________ _________________
Sick leave ____________________ ______________ __________________
Personal leave ________________ ______________ __________________
Holidays ____________ ______________ __________________
Bonus program _________________ ______________ __________________
401(k) ____________ _____________ _________________
Other ____________ ______________ __________________
Why Have a Compensation Plan?
HOW DOES YOUR PAY COMPARE?
You need to compare your compensation and benefits with that of other employers and industry standards in your area. You can obtain this information from sources such as the chamber of commerce, recruiting firms, industry associations, and studies conducted by firms and government agencies. Online sources include www.salaries.com and www.salaryticker.com. With this information, you will have a baseline for evaluating your compensation plan.
USE COMPENSATION TO MOTIVATE EMPLOYEES
Most employees respond positively to incentives. Incentive compensation is additional money for achieving specific preestablished objectives or milestones. In most businesses, paying salespeople a commission for sales made is standard practice. Commissions are usually highly effective in motivating salespeople. One approach is to extend the sales commission model of rewarding specific accomplishments to other positions in your company. For example, employees might receive a commission or bonus for achieving specific milestones such as completing a project on time, meeting budget objectives, or attaining a quality level.
WHAT BEHAVIORS DO YOU WANT TO ENCOURAGE? DISCOURAGE?
Workplace incentives should be designed to produce behavior that will make the business successful. All too often, the wrong people receive rewards. If you want fantastic front-line customer service, you need to recognize and reward the people delivering the service, not just the group manager.