Fresh Thinking about Compensation Processes

September 22, 2016

Having the right compensation systems and related processes is crucial to an organization’s success. A solid compensation system and related processes supports having appropriate pay, rewards and recognizes performance, and keeps employees “engaged”. It motivates people to perform better and helps retain the talent you want to retain.

When inflation was higher, a larger percentage of payroll was put into the proverbial “money pot”. Those monies covered merit increases, bonuses, promotions and any other salary adjustments needed. With a bigger percentage one could divide up those monies to match a multiple performance rating system based on some type of modified bell curve. But that is in the past. With companies having 2 and 3% average merit increases the distribution would now be like splitting hairs.

Fresh thinking asks you and your organization to make your compensation system:
  • Simple & Understood
  • Fair & Transparent
  • Positive Experience for the vast Majority
There are several different avenues to deliver these outcomes but some overarching principals are:
  • Your compensation system and process needs to be clearly communicated in a manner so everyone understands it. That will also make it transparent as well. However if it doesn’t provide enough details than it will not be seen as transparent or understandable. No “smoke & mirrors” please.
  • No favoritism should be given to particular departments, teams, and individuals. At the end of the day, the majority of employees need to believe that the process was uniformly applied so it will be seen as fair. Despite the fact that it is supposed to be confidential, they all talk to each other and everyone is very networked.
  • The majority of your employees should be meeting or exceeding their basic goals and therefore should be getting positive rewards and recognition. This does not include “Stretch Goals” which by design may not be achieved, or only partially achieved. However, if a significant segment of your populations is NOT meeting their basic goals, then you have the usual suspects to seriously consider: 1. The goal setting process was not done correctly and the goals were not clear or attainable; 2. You did not have the right person in the right job; 3. The Manager did not adequately coach or mentor the person. There are other possible reasons, but these are the main ones.

Your Compensation Basics need to be Rethought and Retooled periodically:

  • Base Salary: pay within the market range for the position within your industry. While many start-ups want to pay below the market to conserve cash and be generous with Stock Options and Stock Grants, you run the risk of people exiting after the first 1 to 2 years if nothing happens, (that is an IPO or other trigger to indicate the stock is valuable to them). This is a balancing game for employees and the company. One of the internal issues that cause conflict is when a pay philosophy not uniformly applied. It only takes one person to complain about their salary and then have management make an adjustment to market level for that person, and the whole premise will be questioned. That is a contributing factor to employee disenchanted.  
  • Annual Merit Increase: some of the best new versions are simple. 3% for everyone but the poor performers (who get 0%) and then 6% to those few that blew their goals out of the water. If 6%/3%/0% doesn’t work for you, consider 5%/2.5%/0% or 4%/2%/0%, whatever works for your industry. But if you still want to use 4 or 5 categories you are back to splitting merit increases into 1% differences between categories.
  • Annual Bonus:  Make more differentiation with the cash bonuses then with Merit Increases.  Merit Increases live on forever, as they become the employee’s new base salary. But one-time cash bonuses can be quite different from year-to-year and can really reflect the obtainment of that individual’s, department’s or company’s particular’s year’s goals. Note, Millenniums want to be recognized for their own personal contribution and less about the overall team or company.  Please don’t have cash bonuses that are just extension of the base salary with everyone assuming they are entitled to them. That diminishes their value both to the employees and the company. It is a crying shame if you are not using cash bonuses to really reward and make people feel good and special about their contributions to the organization for that specific year’s achievements.
  • Long Term Incentives: cash poor companies particularly want to use stock options and stock grants as a means to reward and retain employees which is fine. However please keep in mind that younger employees today are not planning on staying more than a few years, so will not vest if you have an average vesting schedule. Many Millennium employees would prefer cash to stock anyway unless they can see the upside on a relatively short horizon.
  • Retention Bonuses: in the past, these have been used primarily to address underwater stock options or an attempt to retain people during high crisis times such as a down turn or a merger for example. While they are still being used in these situations, they are also being used just to retain key people in the face of aggressive hiring. But retention bonuses are by nature a temporary fix, so thought has to be given to longer-term solutions.

There are a thousand ways to reward employees, and much has been written about what you can offer. Just remember that rewards need to be meaningful to the person receiving them. For one individual 2 weeks of extra paid time off would be seen as wonderful. Another person would like help paying off their student loans, another gifts cards, another time and money towards a certification or an advance degree. People are all different, and what they find “motivating” may be different.  But you will be way ahead of the game if your compensation system is perceived by your employees to be:

SIMPLE                       FAIR                        POSITIVE

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