How-To Guide: Optimize your Compensation Plan - Acquira

How-To Guide: Optimize your Compensation Plan

What You’ll Learn
  • How to align your employees' interest with your business goals
  • Attracting and keeping top talent
  • How to motivate employees to do their best
  • Preventing your competitors from snatching your best people
  • How to get top performance without stretching overhead costs

Introduction

An effective compensation plan is crucial to keep your employees satisfied and motivated. Compensations have the potential to positively—or negatively—affect the attitude of your workforce towards your company.

If not satisfied, employees might not work productively, ditch your company and look for other jobs, or even perform actions that could harm your business.

To prevent such problems, you need to develop and optimize your compensation plan for the long term.

In this article, we’ll show you how to optimize your compensation plan even if you have no HR experience and motivate your staff to deliver their best all the time.

Types of Compensation You Can Leverage

Compensation is providing monetary value to your employees, urging them to perform at their peak capacity for you.

To achieve this, there are some primary types of compensation that you must know. 

Base Pay (Salary and Hourly Wages)

Your employees’ base pay is their primary source of bread and butter in most cases. You provide them with a monthly wage depending on the number of hours they work per day. There are some exceptions in some job types — more on that a bit later.

If your salary package isn’t sufficient for your employees, they will spend their time trying to figure out ways to meet their needs, all while sitting in their workspace.

Provide them with an attractive salary package so they perform at their best, without dealing with any mental stress.

Commissions

The exceptional job types mentioned earlier are better off with a commission salary system rather than a fixed hourly wage. This type of compensation is particularly popular in sales jobs, where an employee earns as much as they can sell. 

This approach is useful in motivating your sales reps to do the best they can. Because their personal wage also depends on how well they perform. Oftentimes, you’ll see a commission structure along with a base pay that is lower than market value. 

Bonuses

Bonuses are a nice way to thank outstanding employees and keep them motivated.

There are many ways to set up bonuses. You can even create and use your custom ones. However, a common approach is to provide bonuses on special occasions like the end of the year or Christmas.

There are some problems associated with such bonuses, though. Let’s say your employees do an amazing job with a project in June but you provide them a bonus at the end of December.

Throughout this period, the value of their amazing work has reduced and the motivation they’d get for future exceptional performances suffers. 

However, there are some effective ways to deal with this issue. For one, you can provide bonuses right after your team successfully finishes a project. Second, you can provide special, “Thank you” bonuses to specific employees who have done an extraordinary job for you. Another option would be to provide bonuses each quarter as long as the company hits its financial goals for that three-month period. In order to do any of these bonus structures, you as the business leader need to set clear goals for your team. 

Equity

Equity compensations are a reliable way to align your employees’ interests with your own. They are especially useful and applicable for smaller companies or startups that don’t have enough monetary resources to compensate all of their employees. 

Equity compensation is non-cash pay that may include performance shares, restricted stock, or options. The employee represents the ownership of the asset within the company.

However, you must paint a clear picture for your employees about their relationship between ownership and personal financial situation. Coming back to having clear goals as a company: this helps your equity partners understand the value they are working for. 

Keep in mind, a 100% equity compensation will probably only last for a short period. At some point, your team, especially your leadership team, will want a mix of cash and equity.

Benefits

Benefits compensation is an effective way to set your company apart in terms of what it offers to its employees. It’s a way of paying for a good or service and then giving it away to your employees. Some common examples of benefits compensation are residence, insurance, transport, and communication devices. 

To decide whether you should provide benefits to your employees or just pay them more, think about the utility your employees will get if you grant them a certain benefit. Moreover, the price of the benefit also plays an important role in your decision. If you’re having difficulty figuring out which benefits to give out, don’t shy away from asking your employees directly.

How to Design an Effective Compensation Plan

There’s no one-size-fits-all strategy when it comes to designing an effective compensation plan. Every company has a unique culture that must be represented in its compensation plan.

Also, employees of various ranks inside the same company must also be addressed differently. 

However, here’s a step-by-step way to design your compensation plan effectively:

  • Create a general outline on how to optimize your compensation plan. Decide what kind of compensation you’re going to allocate to different levels of employees in your organization. 
  • Realize that there’s no objectively “right” or “wrong” way to design compensations. Rather, it’s a metric of what’s right for your specific organization and workforce. 
  • Hire a compensation manager to professionally take care of your incentives. This position is usually filled under the human resources department. 
  • Choose a compensation philosophy based on the industry you’re in. Look at what your competitors are offering. Are you going to offer high payrolls with fewer benefits? Or more benefits accompanied by a smaller payroll? Figure it out. 
  • Develop a pay structure for jobs of different ranks in your organization. Compensations must be directly proportional to the ranks.
  • Based on your organization’s budget, develop a sheet of concise information about payrolls, hourly rates, and benefits you can offer to each individual position. This is the step where you get really specific. 
  • Based on your plan, get your company’s terms and policies sorted out for incentives. This will help you stay clear of potential legal issues in the future. 
  • Determine how you’re going to communicate your compensation plans to the audience. Do it in a way that’s attractive for your future employees, as well as your current workforce. 
  • Analyze your performance and determine what works best for you. Make changes to your strategy according to what works well and what doesn’t.

When you’ve created your compensation plan, the next step is to fine-tune it as a tool to motivate enthusiastic performance from your employees.

How to Optimize Your Compensation Plan to Maximize Employee Productivity

Your compensation plan has a direct impact on your employees’ productivity.

It will decide whether they work at their peak performance and produce effective results for you, or just do the bare minimum.

Here are some ways you can optimize your compensation plan to boost your employee productivity:

Tailor your compensations to various ranks of your organization

To get started, tailor your incentives to your company culture and organizational structure. Decide what levels of compensation you’re going to grant to employees of different departments.

Set performance criteria and deciding factors for every department, and the employees in it. 

Set reasonable targets for promotions and benefits

Make your targets as clear as possible. They should be quantifiable and measurable so employees know exactly what they need to do in order to receive a bonus.

If targets are ambiguous, several problems (like managerial discretions and employee disinterest) could happen.

Set controllable metrics

Deciding metrics should be purely based on how well an employee performs. Employees should have high authority over the results they’re generating. Outside factors like market values and trends must not be affecting their controllability. 

Set reasonable targets

You shouldn’t set your expectations so high that there’s no statistical way to achieve them.

The targets your employees have to hit to receive a bonus, benefit, or promotion must be logically achievable. You shouldn’t set your expectations so high that there’s no statistical way to achieve them.

Employees will be demotivated to chase a goal if they know there’s no way they can reach it. 

Targets shouldn’t be too easy

To counter the extremes of the previous point, you shouldn’t set your expectations super-low. The targets you set should be achievable, but not so easily that every employee can achieve them. Employees must have to perform extraordinarily to hit a bonus goal. Hence, make your targets challenging.

Rewards should be compelling

Employees need to have a solid reason to chase the goals you’ve set for them. Rather than providing benefits to a greater number of employees when they hit an easy goal, provide compelling rewards to fewer employees who perform extraordinarily. 

Stress-test your incentives

Put your compensation to the plan and see how it performs. You can use your historical financial data and performance metrics to check how things would’ve worked out with your incentive plan.

Also if you have future projections, you can use that to see a picture of your plan in action going forward.

Find out if you can get higher employee performance with larger payouts. Also, check if the performance matches any additional overhead costs.

Align goals with your company interests

Your employees shouldn’t be chasing after something that won’t benefit your company a good bit. You and your company should reap great benefits when your employees hit a specific goal.

It is important to note that the goals of different employees or departments might differ, but ensure they don’t clash with each other.

Balance your compensations

Your competitors also have their own unique set of benefits they’re willing to provide to potential employees. To attract the top talent to your company, provide benefits that outshine that of your competitors.

However, you don’t have to spend more than you should on your employees. Remember, your business needs to control its expenses if it wants to thrive.

Key Takeaways

As much as in any other part of your business, your compensation needs to maintain a delicate balance to thrive. You need to keep employees challenged, satisfied, and aligned with the goals of the company while driving performance that makes the business prosper.

A well-designed compensation plan that is optimized for employee top performance is

  • Tailored to the individual levels of contributions to the profit of the organization
  • Achievable yet challenging enough to attract and retain top talent, and
  • Gets the employees excited about helping the organization reach its goals

What is another way you can optimize your compensation plan and strategy to encourage employees to perform their best? Share with us in the comments below. We could feature your comments in future updates of this article.

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