The Impact of Compensation Methods and Decisions

The Impact of Compensation Methods on Employees and Organizations The Impact of Compensation Methods on Employees and Organizations

It’s time to think about the many, sometimes subtle, choices behind determining appropriate compensation of your employees. The success of your organization can ride on these compensation decisions.

From the mom and pop shop that needs workers to restock shelves to large corporations whose employees manage million dollar funds, your organization’s compensation decisions can either boost your bottom line or leave it in the gutter. The key is to make realistic, budget-friendly compensation decisions at each step.

A Simple Example of the Impact of Compensation Methods on Organization-Wide Success


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We’ll use an example to cover questions you should ask as you go through hiring, managing and paying employees. An organization’s compensation system has been shown to have an impact on its overall success, and you don’t have to look at a big company to see these effects.

In our example, let’s say you own a small store that sells souvenirs in a tourist area. Tasks that must be done at the store everyday include sell items, run the sales floor, schedule staff and keep the books and records

Let’s say that your store is now big enough that you need help to do all of these tasks. This limited example brings up questions that will help you think about your compensation strategy, both short and long-term.

Your Employee Pay Rates vs. Market Pay Rates

Do you pay at or below the market? It depends on how competitive the job market is in your area. Can you afford to pay minimum wage for help in your store and still attract a good staff? For example, minimum wage is $8.55 per hour in Washington State, which is high compared to many other states. Although there can be exceptions for very young workers, let’s say you will pay all your employees at least your state’s minimum wage.

Part Time vs. Full Time Compensation

You need to have the sales floor covered at all times, such as when employees go on breaks or eat. You will work full time, but you need a couple of part-time staff to cover breaks and to back each other up when they take breaks. Maybe there’s no need for another full-time employee, yet.

Benefits vs. No Benefits

Another reason, perhaps, that you hire part-timers is because you cannot afford to pay employee benefits. You know that employee benefits will cost at least 35% of an employee’s wages. You want to be realistic about this decision because you know that when you hire people, you must do all you can to pay everyone on time, every time.

Hiring Contract Help for Your Organization

You can save payroll expenses by contracting out keeping up the books and records to a certain extent. But, you have to ask yourself if contracting out any of this work is feasible? You will not have the control over the contractor that you do over an employee and you cannot direct a contractor on their priorities or work methods. Can you live with that, or will it make you too nervous that they might forget something?

The Cost of Training Employees

Does your preferred contractor charge a premium that more than pays the cost of benefits if you hired an employee to do the same work? Would you rather have a specialist (contractor) doing the work than an employee who may need a few years of training to reach the same level of expertise? Is expertise from the get-go important enough to warrant the higher premium?

Varied Demand

Are there times of day or months of the year you know you are likely to have more customers in your store? If so, does that time correspond with an increased number of people looking for work? In a tourist area, there may be more customer traffic in the summer and mid-winter because schools are out and families have time to travel. These busier times in the shop are also times when there are people looking for minimum wage jobs, such as college students home for the summer or for winter break. That extra workforce may make it easier for you to hire during busy times.

Hiring a Full-Time Manager

Should you hire a full-time assistant manager to help you? It is very hard for one person to find time to keep raw sales data for the contractor to compile, respond to complex customer requests, and do all the other things that a person in charge has to do. If you choose not to hire an assistant, is there a time after the store has closed that you can feasibly do that work, since you probably cannot do it during store hours? Or is your store open 12 hours per day, seven days per week? If you have to work on your books or whatever in hours 13-16 every day, what kind of quality will they be in? What kind of life will you and your family have, with you working that much?

Competing for Employee Talent

Capable, reliable assistant managers can be hard to find. What wage are you willing to pay your assistant? What wage do your competitors pay? Here, your competitors are other potential employers of the assistant manager. Remember that is typically a larger group than other small stores that sell souvenirs in a tourist area, the group you normally think of as competitors.

Now let’s consider your other employees. Let’s say you find out that other shop owners in the same area pay their employees who work on the sales floor, cashier, and do shipping and receiving between $8.55 and $11 per hour. We’ll call that the salary range. You will probably want to pay somewhere in that range to be competitive with the other stores for employees. Should you pay initially at the top of that range or at the bottom? That choice typically depends on factors such as seniority, experience of the employee, how hard the job is to do, and how hard it is to get capable, reliable people to take the job and stay in it.

Let’s assume you are new to having employees, and most of what I said in the paragraph above sounds a like another language. In that case, you may prefer to get more experience with employees before you start paying them more than minimum wage.

Controlling HR Spending by Being Flexible

Compensation choices do not always cost a lot. In fact, some can be free.

For instance, you may want to only start with two part-time employees to cover breaks and meal times. They may only be able to work three hours per day for you five days per week. It’s awfully tough for anyone to make any kind of money on that.

Minimum wage jobs are not held only by teenagers who are only earning spending money. They can be held by anyone - people saving for college and people trying to do whatever they can to support their families. They may have more jobs than the one they have with you. They may be attending classes.

You can help them, and build their loyalty to you, by working around their schedules. If they have a second or third job, your willingness to do that will mean a lot to them because it helps them bring in much more money than if you were not that flexible.

Other free or low-cost tips like this are available in previous blog posts, such as “Non-Monetary Compensation” and “Employee Rewards.” And don’t forget the intrinsic benefits of working with a pleasant and knowledgeable staff. Word gets around quick about who is great to work for and who is not. This benefit can help you attract and retain workers.

Regards,

Joe Gross
HR & Policy Solutions, PLLC

Note: Even though I have worked with employment laws for over 20 years, I am not a lawyer. Nothing in this blog should be taken as legal advice or interpretation of laws.

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.

Are you doing a salary review or compensation benchmarking project? PayScale provides up-to-date, external salary market data you can use right now. And, it is specific to the education, skills set and experience your employees. Give a PayScale demo a try.

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