There are not many second chances in running an organization. A misstep can cost thousands of dollars to correct. For instance, not setting up your compensation strategy correctly can mean you’re not able to attract the talent you need. By contrast, your overall rewards and compensation strategy is one area where you get a second chance.
The following is my perspective on and suggestions for how to set up an employee rewards and compensation strategy, as well as strategies for each of those two systems.
Optimize the Benefits of a Rewards and Compensation Strategy
Many organizations set up an employee rewards systems after they set up a wage or salary system. But, by coordinating the two into a comprehensive rewards and compensation strategy, you can boost your profits and workforce productivity. Even better, by implementing an employee rewards system you get a second chance to optimize your overall compensation package.
Keep in mind that some employee rewards systems are surprisingly cheap – even free. As organization people, we have the same motto in common: free is good.
Components of an Employee Rewards and Compensation Strategy
Components of an overall compensation and rewards strategy often include:
- intrinsic rewards
- monetary rewards
First, you must tailor your compensation strategy to your industry, your workforce, and your organization location. After we discuss that, we’ll discuss reward strategies.
Compensation Strategies Range from Basic to Complex
A compensation strategy ought to reinforce your organization’s needs and values and can strengthen workforce alignment. A sound compensation plan will position your organization in its market, contribute to its reputation, and help you attract and keep employees.
Compensation plans often include a range of components such as
Much of a successful compensation strategy, especially in a competitive market, depends on what your competitors’ compensation systems include. Here are some of the most common components to consider when developing a compensation strategy.
Employee Wages and Salaries
I use “wage” to mean hourly pay and “salary” to mean annualized pay. No matter how you pay your employees, it’s important to perform regular salary benchmarking and to use up-to-date, specific data for your positions. PayScale has great information and resources, as well as helpful tools for you to use to make the most of the information.
Another source to check data through is the Department of Labor. The Washington Employment Security Department is another potential data source. The data will likely be a couple of years old, so it may need to be “aged” to bring it up to current levels. I use the Bureau of Labor Statistics’ inflation calculator to help me age data. The calculator lets you plug in the amount and year of the data and will show you a result corrected for inflation. This is generalized, and if you can find better inflation data for your area, use that instead.
What’s your strategy for paying your employees? You may choose to set your wage or salary levels at the mid-range of your market. If you choose to pay lower than the market rate, you may not attract the “star” employees. If you do not need to attract “star” employees, do not pay the extra amount that will attract them to work for you.
On the other hand, if you do need stars and you get too zealous about attracting them by being at the top of the market you may find yourself in a pickle when they want a raise. Then you’ll need to exceed the market, or risk the employees going to a competitor.
Wages or salaries are often referred to as the “base,” meaning they form the basis of employee compensation, even if they are the entire employee compensation. This definition will be important later on.
Commissions can be used several different ways:
- Replace a salary after an employee gets seasoned in the field.
- Take the place of ever paying salary and wages.
- Be blended with salary and wages the whole time
Consider using commissions to supplement salaries (often called “base plus commission”) up to a certain percentage. You could also use different percentages to emphasize particular needed results. You could tie commissions to performance and sales to induce employees to achieve higher levels. Some successful companies give high salaries and low commissions, and some do the opposite. They choose depending on the industry expectations and the workforce development strategy.
Bonuses. Wages, salaries, and commissions can all create a “bow wave”. That is, future wages, salaries, and commissions must exceed the current levels to seem to the employees like improvements. This can be true even if the economy is bad and revenue is down.
In my experience, bonuses are best used as rewards. I know some industries have long considered them as employee entitlements. However, if they become part of the base this way, they make the “bow wave” taller and harder for you as the employer to “top” in the next compensation negotiation. Another possible outcome is your employees will expect bonuses regularly even if their performance does not warrant them.
A Lesson Learned from AIG
AIG is to me an example of what can go wrong with bonuses that become part of base pay. Regardless of what you hear about AIG’s “performance bonuses,” I have a hard time accepting the concept that employees who supposedly performed so well had to have the government essentially buy 80% of the company. Not only was it hard to choke down the first time we heard about it as taxpayers and employers initially, now we find out they are given quarterly! If you think of this as an employer, it may aggravate you to lose one of the tools you can use to legitimately encourage higher employee performance levels.
Employee Reward Strategies Range from Basic to Complex
Developing an employee rewards strategy is really the place to play, have fun and be creative.
Reward strategies can be uniquely yours, and distinguish your company as “the” place to work. This is an excellent opportunity for reinforcing your organization’s brand. Giving gift certificates or cards in a down economy is great.
Several organizations may join together to promote each other’s organization by giving gift certificates to each other’s companies as a reward for good performance. Employees meeting a performance goal or working together to meet an extremely tight timeframe may be good cause to treat them to a party or picnic. Some organizations even give away trips as rewards to their top sales producers.
Don’t forget that your workplace environment can also be a huge benefit to employees. That is why I consider it part of an employee rewards system. Here is a list of ways you can make your work environment more positive for your employees
Support your high achievers. High achievers want to work with other high achievers. They know that even a few low achievers will consume most of the attention of an organization and suck the life out of it. Set up performance improvement programs for your low achievers, and hold them accountable for following-through. If performance does not improve, help them transition out of your organization.
Give respect. Empower your employees who have proven to you that they have good judgment by allowing them to make recommendations on how to handle difficult situations.
Be kid-friendly. Pair up with an area day-care provider to make day-care available to your employees at a discount. Having children close by is not only a great comfort to parents but saves the enormous “late-fees” they have to pay if they get caught in traffic or have to work late to make or answer that last phone call before leaving for the day.
Make transportation green and cheap. Transit passes offered in your organization are a great way to participate in making your organization environmentally sensitive. Who knows? There may be governmental inducements available to you for doing that.
Promote healthy choices. You can also pair up with a neighborhood athletic club or gym, either for gift certificates or reduced membership for your employees.
How to Evaluate a Reward and Compensation Strategy
How long have you tried to make your reward and compensation strategy work? If there are cycles involved in your organization, you might want to wait to get all the way through a cycle so you can evaluate the benefits of your rewards and compensation strategy or system under the full range of common circumstances.
Did your employee rewards and compensation strategy or system, especially the rewards, achieve the results you intended? If not, try something else. Keep trying and be sure to have fun with it!
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Are you paying your best employees enough to retain them after the economy picks back up? Get up-to-date and make sure your external salary market data is specific enough to the education, skills set and experience of employees you want to keep. Give a PayScale Demo a try.
- Get accurate compensation data with a free PayScale Compensation Report.
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