My last column addressed the need to simplify your business and focus your efforts during the new year. Still, half of my e-mail responses to the column asked for help with compensation issues. I sit on several advisory boards and am constantly asked for input on salary and bonus plans. I would love to avoid the issue in this column, but it will not go away. Therefore, here is my attempt to offer a few ideas.
One of the most difficult challenges you will face in your business is compensation planning and management. We have all lost employees because of better offers from competitors or just because the employee was disgruntled over pay and benefits.
My focus here covers correct principles that I have seen practiced over the years instead of trying to tell you what to pay your people. Follow correct principles and maybe you can avoid problems and turn compensation issues to your advantage.
Principle 1 — Establish a compensation policy or procedure. The document should address issues such as when employees are reviewed for compensation adjustments; how often employees are paid; what to do when exceptions arise; how managers should handle compensation discussions, including compensation issues during employment offers; and a statement regarding non—discrimination compliance.
Principle 2 — Pay commissioned employees for performance. Compensation programs that reward sales and marketing professionals for positive behavior can be critical to a company's success. Consider paying a reasonable base salary to cover basic living expenses, and then reward the employee for hitting the sales target.
I am often asked if the company should increase the commission rate if the sales target is reached. I like tiered commission percentages for two reasons. First, the more sales the better. And second, I do not like a salesperson delaying revenue to the next period just to play with the system. The only exception is when the company cannot handle the increased volume due to capacity constraints.
Principle 3 — Reward non—commissioned employees. Employees know when they have done well. If the company meets its target, pay a bonus based upon profitability or some other measure. A program that rewards results will help produce the desired effect. One concern: employees perform at various levels. Handle this challenge by setting an overall bonus amount or percentage of revenue for the company and then retain some discretion over how it will be divided up, not whether it will be paid.
Principle 4 — Research and network. Just because your plan is working today and is competitive does not mean that you can relax. Don't wait for the loss of a key employee to ring the warning bell. On a regular basis do the following: review published information from industry associations, employment firms and companies that provide data for a fee; contact university placement centers for average starting salaries for their graduates; contact your CPA firm (many of the national firms conduct industry compensation surveys and publish the data for their clients); and network with other company leaders to see what is happening in their market.
Principle 5 — Develop separate compensation schemes for specific programs. If you have an incentive program lasting only a short
period of time or that addresses a need that will not be recurring, consider doing something different. Provide incentives such as a big screen TV or stereo system for hitting a one—time target. Don't change or fuss with the system.
Principle 6 — Assume that you never will have it right. Winston Churchill said, "Let our advance worrying become advance thinking and planning." You will be at your best when you realize that compensation issues will always be a worry.
Gary Williams, a former chief executive officer of a high-tech firm, is affiliated with the BYU Center for Entrepreneurship. He can be contacted via e-mail at firstname.lastname@example.org.