As baby boomers start to retire,
America finds itself with a shrinking
and changing work force. As employers struggle with the new challenges of keeping an experienced work
force, they are looking at their compensation systems. Pay too little, and your work
force will leave you. Pay too much, and you
may be put out of business by lower-cost
competitors.
“Pay-for-performance systems are the way
to strike the balance,” says Joel Adams,
CEO and founder of Devon Consulting.
“Tying pay to the value of the output
decreases the risk that the employer is paying too much or too little.”
Smart Business talked to Adams about
the importance of fair compensation in the
workplace.
How can employers decide the best way to
compensate their employees?
Every company does it differently, and
most companies keep tweaking their plan.
Every plan seems to have its benefits and
weaknesses. And everyone is paid for performance in one way or another.
Even if everyone is on a straight salary,
you pay your best and most experienced
people more money because you expect
them to accomplish more. The problem
with straight salary systems is that the connection with productivity and overall company performance is too loose. Companies
can find themselves granting everyone an
annual increase while the company is losing money.
What other options do employers have?
In almost every industry, commissions
are the norm for the sales staff, while
piecework has been used in many production jobs. But for office workers, the service sectors and the entire knowledge-based
economy, those models don’t fit very well.
Companies can connect everyone’s compensation to the bottom-line results of the
company through profit-sharing plans and
stock grants and options. But the weakness there is that employees rarely feel that
they, personally, can affect the bottom line enough to make a difference. So those
plans have little effect on productivity.
On what kind of performance should we compensate people?
People are complex with multiple needs
and motivations. For the most part, they
are trying to do what management wants
them to do. And compensation is a greater
communication tool than a motivational
tool.
Say it’s 4:45 p.m. and I really want to get
home on time. Which project do I work
on? Which piece absolutely must be
completed and which one can wait until
the next morning? Employees assume
that what management is willing to pay
for is probably more important than
something management is not willing to
pay for. The compensation system helps
me set priorities.
People also need to be compensated for
something they have control over, or at
least something that they can affect in a
significant way. If they are compensated
for something they don’t have control
over, then the system is seen as unfair.
And the communication tool has been
wasted.
So we are constantly looking for things the employee should be doing to help the
company achieve its goals, how to measure those things and how we should tie the
compensation to them.
Should all pay be based on performance?
No. In fact, the compensation for most
jobs needs to have multiple components.
Outside of sales, most people receive the
majority of their income from an hourly
wage or a base salary. But many people
also have a bonus piece in their compensation package. Even if the amount of the
bonus is small in relation to the salary, it
can be huge as a communication and motivational tool. And getting the bonus piece
right or wrong can have an impact on the
bottom line far in excess of the amount of
the actual bonus.
Your compensation system must support
your company’s culture as well as support
the process that makes your business
model work. For example, if you need
great individual performance, the bonus or
commission is probably going to be based
on the individual hitting his or her goals.
Where you have high commission plans,
you usually find some star performers. But
a high commission plan may not foster a
lot of teamwork.
If, on the other hand, you have a development effort such as developing a new product or doing research, where everyone
must work as a team, then salary will probably account for most of the compensation
and the pay-for-performance piece needs
to focus more on team goals and team performance. In many cases, compensation
for individual performance can destroy
teamwork.
How do you know if your compensation system is a good one?
The company is hitting its goals and the
employees are happy. Turnover is low and,
probably, at least some of your people are
making a whole lot more than their industry peers.
JOEL ADAMS is CEO and founder of Devon Consulting. Reach
him at (610) 964-5703 or [email protected].
