Business owners have a focus on the enterprise itself, and can sometimes overlook the simple fact that their team members are there for the purpose of earning an income, not growing a business. However, the income a business owner receives has a lot to do with the performance of the employees and therefore is important to the success of the business.
Entrepreneurs can be influenced by their company’s position at a given point in time and be either generous or parsimonious depending on how much money is in the bank. Their employees have a different perspective and expect employment conditions including salaries to be related more to market conditions and the cost of living than their employer’s welfare.
A Compensation Strategy can be Good for Business
Having a compensation strategy can stabilize things like rates of pay and keep morale and performance on a more even keel than if remuneration is based on the owner’s emotions.
Naturally, there is always going to be a correlation between the revenues of a business and the amount it has to expend on salaries and salary increases. This doesn’t mean, however, that the priority the team members give their own welfare can be overlooked or ignored.
If a top performing team member leaves the business for a better-paying position, the costs of the subsequent recruiting process will quickly show that you probably have to spend more to replace them than it would have cost to retain them.
Furthermore, the salaries paid to people in certain key positions become reference points for downstream positions in the business. If the amount paid the new-hire is noticeably different from the salary of their predecessor, this can create pressures for increases from a number of other members of the team.
Budget for Increases and Incentives
Just as wages are a budget item, it’s equally important to have an amount of money allocated for pay increases. This can be a fixed percentage of the wages budget that is in addition to it, set aside to be used at management’s discretion to reward outstanding performance and as a recruitment incentive if needed. It can also be used defensively, to retain a key person who’s being targeted by a competitor.
Determining those whose performance is outstanding is a management responsibility. Each position should have its own performance indicators that can guide management in its remunerations decisions. Standards used to evaluate performance need to be both realistic and applied in a consistent way.
This means that to some degree it is usually necessary to distribute the amount allocated for pay increases unequally so that it motivates the firm’s top performers. However, it is just as necessary to ensure that the process for determining compensation is the same across all parts of the business.
Cash is Still the Preferred Incentive
According to a recent PricewaterhouseCoopers Trendsetter Barometer, cash incentives predominate as the form of compensation used by the fastest-growing private companies in the US. Cash-based incentives, can include awards for long-term performance, bonuses, commissions and other components.
However, there are additional non-cash ways to compensate team members that can also be used to great effect, but must be incorporated into the annual budget. Travel, entertainment and even training can all be included as part of the businesses’ overall compensation strategy, and these can bring benefits to both the employee and the business if applied correctly.
Equity Participation May be the Answer
To reward really outstanding performers and encourage them to remain with the business some form of equity participation may be offered. Just as with other non-cash kinds of remuneration, this shouldn’t be seen as a substitute for cash but rather as a form of “performance bonus”.
It should also be noted that changes to the legal and taxation environments in some countries have made offering equity participation to employees a much more complicated form of reward than it used to be and legal advice should always be sought before such offers are made.
Owners seeking sympathetic treatment from their team members when it comes to the quantum of the increases would be well-advised to keep their employees in the picture about the company’s economic fortunes.
Always keep in mind when designing a compensation strategy for your business that there have been a number of recent lawsuits about the design or the implementation of a compensation plan, often after the termination of an employee.
Help employees understand that their jobs are a part of the company’s overall activities and how the business needs to follow a budget while it operates. Keep them fully informed and they’ll be more likely to see your point of view when things get a bit tough.
And be sure that your compensation strategy complies with all applicable legislation including those covering such areas as wage and hour obligations, commission payment obligations, minimum wages and equal pay.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.
Chris’ combination of academic credentials, career experience and temperament ideally suit his calling as a business development advisor. Clients say he has a mind for business and a heart for service.