Designing a compensation plan for your employees can be a challenging task. The amount that you pay your staff should be close to the market rate. At the same time, it is essential to link salaries with performance.
Employees should not get the impression that they will receive the same salary regardless of the quality or volume of their output. An effective compensation program is one that spurs workers to perform at their optimum level while aligning their work with the objectives of the organization.
How can your small business devise an ideal compensation plan? Here are some guidelines that you may find useful.
Introduce profit-and-loss bonuses
In his book titled Entreleadership: 20 Years of Practical Business Wisdom from the Trenches, small business owner Dave Ramsey says that paying employees based on the profits that your company makes can be the most rewarding but demanding approach.
He uses this policy for his top executives who run the firm’s operating divisions. Bonuses are based on the profit that each division makes.
Referring to the compensation structure, Dave Ramsey says, “Every single person on this plan is making more money than they have ever made in their lives. The plan is scary because you have to be prepared to pay an employee a compensation that has no ceiling.”
But the logic of such a structure is irrefutable as it serves the purpose of meeting the company’s profit objectives.
Bonuses can be counterproductive if they are paid regardless of performance
As an employer, do not make the mistake of paying bonuses even to those employees who do not meet their targets. This sends the wrong signal as workers realize that they will get paid regardless of their output.
A recent survey by Wills Tower Watson, a global advisory and broking company, found that over a quarter of employers pay bonuses to employees even if they fail to meet expectations. Another key finding of the survey was that only 20% of employers in North America say that merit pay helps to improve individual performance.
These findings show that it is crucial that your employees be provided with a bonus structure that clearly links pay with performance.
Your incentive plan should be easy to understand
A well-devised incentive program can play a key role in boosting productivity and focusing the efforts of your employees. On the other hand, a complicated program will only serve to confuse the workers and demoralize them.
Doug and Polly White, Principals at Whitestone Partners, a management-consulting firm, point out that the work that employees do should have a significant effect on the amount of incentive that they earn.
If your employees can establish a direct connection between their work and the amount of bonus that they earn, there is a greater likelihood that your compensation program will succeed in what it has set out to achieve.
Your incentive plan should encourage teamwork
There is a very real danger that employees will focus only on their individual outcomes and ignore the big picture in an effort to meet their targets. This attitude may earn them their bonus, but it could pull down the company’s overall performance.
When setting targets, it is important to lay stress on teamwork and to link the achievement of collective goals to bonus payouts.
Remember that a well thought out compensation plan that incorporates a significantly large variable component can help your company achieve its targets and boost profits.
It is in every small business owner’s interest to spend time and effort in devising a compensation structure that will motivate employees and encourage them to work towards the company’s goals.
Ravinder Kapur is a business operations writer at Aepiphanni, a Business Consultancy that provides Management Consulting, Implementation and Managed Services to business leaders and entrepreneurs seeking to improve or expand operations. He is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry for more than 30 years. His finance expertise includes the commercial vehicle, automotive, and construction equipment sectors, as well as corporate finance. His experience in these disciplines has included business development, credit analysis, risk management and financial recovery. In addition, he worked extensively in corporate finance recoveries and was involved in several large value arbitration cases.
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