Many companies have spent significant time and effort in recent years to move away from the traditional one-size-fits-all type compensation plans and instead favor a more customized solution. However, the challenge to achieve desired results in attracting and retaining talented workers, within company means, remains prevalent. While at times the issue may be poor job role, poor culture fit, or external circumstances beyond the employer and/or the employee’s control, more often than not the lack of success is the result of a misalignment of the compensation plan with the worker’s role in the company and incorrect implementation practices.
Most of these occurences can be avoided if the following best practices are maintained:
1. Tailor the Compensation to the Employee’s Specific Role
To create a compensation plan that achieves the desired results, it is important to provide compensation elements that incentivize certain behaviors. Here, the focus should be on an employee’s particular role and strengths as well as the company’s needs to maximize the return for the expended efforts and the compensation paid. For example, if an employee excels at business development, the bonus structure should reward him or her for new business brought to the firm rather than for a certain quantity of financial plans produced or client meetings held. If, on the other hand, an employee is skilled at client service but, typically, does not bring in a lot of new business, the bonus structure should emphasize the service element such as the number of financial plans produced, and pay an attractive bonus. It is important to keep in mind that additional bonuses may still be paid on other activities that are beneficial to the company but do not pertain to the employee’s particular job role or strengths. However, such bonuses should not be the main element of the compensation plan.
2. Communicate Expectations and Results
A compensation plan is only as good as the company’s communication of its expectations and intended results. Such communication is more effective if it acknowledges a reciprocal relationship between an employee and the company and therefore includes the expectations and results for both parties. This is typically accomplished by outlining the employee’s qualifications and responsibilities as well as the company’s commitment to career progression and compensation in a career path summary for a particular job role. The details outlined in the career path summary should then correspond with the elements of a compensation plan that is specifically tailored to a particular job role level. Both career path and compensation plan should be reviewed periodically and potentially adjusted to make sure they are clear and achieve the desired results.
3. Use SMART Goals
As an employee’s goals are determined, it is best practice to set SMART goals to maximize his or her performance and promote job satisfaction. SMART goals are:
- Specific (direct/detailed)
- Measurable (quantifiable)
- Attainable (realistic)
- Relevant (aligning with the company’s mission)
- Time-based (deadline driven)
Using these metrics will ensure that team members do not feel overwhelmed and challenge themselves to achieve their goals.
4. Align Performance & Compensation
When it comes to using compensation as a means to incentivize performance, timing is everything! For best results, compensation should closely follow performance. This ensures that the employee associates the reward with their behavior and is more likely to repeat the desired behavior. The more time passes, the weaker this association will be.
5. Stay Within Company Means
The pressure on companies to offer attractive compensation plans is tremendous given today’s competition for talented workers. As a result, many companies use compensation studies to determine how much they will need to pay an employee to beat the competition. Compensation studies, however, should be used with caution since they can include a broad range of participants and often communicate only one particular aspect of the employment relationship – compensation – and they might therefore lack information with respect to required work hours, level of skills and responsibilities, other perks, etc. For some firms, the use of compensation studies can put significant strain on the company’s financial health if the compensation benchmarks exceed the company’s financial resources. To avoid profitability issues, it is therefore important to ensure that:
- Revenue ranges are determined based on the company’s financial means,
- Any overlap in compensation is eliminated (i.e., paying multiple bonuses for the same activity), and
- The calculation of the bonus amount is predictable.
To avoid profitability issues, some companies are inclined to impose caps on bonuses paid. However, depending on the circumstances and the type of bonus paid, the bonus amount may not need to be capped, for example, if the generating capacity of any new business sourced by the employee exceeds the bonus payment. A bonus cap has the tendency to restrict high performers and slow down company growth.
In summary, for a compensation plan to yield the desired results, the process should start with the end goal in mind and then focus on how each employee can help reach such goal based on their particular job role. Once the goal for the company and the associated goals for the employees have been established, a compensation plan can be created that drives the behaviors needed to accomplish the company goal by tying behavior to compensation.
Learn more about compensation options that incentivize certain behaviors →