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A Win/Win Compensation Plan
By Eduardo Suarez-Solar
All companies, regardless of size, need well-communicated compensation plans because they can be strategic tools for recruiting, motivating, and retaining employees. Organizations utilize these plans to set hiring pay, determine base pay increases, provide performance incentives, and justify compensation decisions. A company with no compensation plan will be at a competitive disadvantage because it will inevitably pay employees too much or too little, thus causing an enormous amount of issues.
A compensation plan should answer several critical questions:
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How competitive should employee compensation be?
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Will you pay at the middle of the market?
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Will you pay at the lower part of the range?
- Will you pay at the higher part of the range?
- What market are we competing in with regard to our employees?
- Are the companies we compete with in the same industry?
- Are they other local employers?
- Could they be regional employers?
- Will your company use variable or incentive compensation?
- If so, for which groups of employees?
- What types of incentives will be used?
- What part of total compensation will be variable?
- When will it be paid?
- How will a company administer base pay?
- How will base pay increases be earned?
- Will performance determine an employee's increase, or will other factors, such as seniority, play a part?
- When will base pay increases be paid?
Remember, compensation programs should be designed to pay employees for their contributions and to reward high achievement.
Many companies have moved away from traditional pay systems and focus on performance/merit-based or skill-based pay programs, which reward employees for actual work performed. Performance-based pay includes bonuses, shift differentials, merit pay, and incentives. This pay strategy recognizes individual accomplishments in areas such as customer satisfaction, technical expertise, leadership, and adaptability.
Performance/merit-based pay enables companies to pay employees for their work and expertise, rather than just paying for positions. It focuses on competencies needed to fulfill job requirements, such as problem-solving capabilities and inventiveness. Additionally, employees have to demonstrate proficiency before advancing to higher positions.
Companies that want to implement a merit increase program should consider the following:
- Limits On The Increases:
Increase amounts should be high enough to motivate employee performance without exceeding budgetary constraints. Smaller increases can be given to workers with low-paying jobs, while top-level employees such as managers will need larger increases to motivate performance.
- Timing Of Increases:
Increases can be awarded at the same time each year using a common review date or period for all employees. Alternatively, employers can award increases at various times throughout the year based on individual employees' anniversary dates.
- Amount Of Increases:
The amount of the increase depends on the results of an employee's performance appraisal and the available increase budgeted.
Companies that do not limit their merit increase budgets can award specified increases based solely on employee performance. Instead of giving raises across the board, companies are carefully selecting which of their best employees should be rewarded, and creating an emphasis on total rewards packages instead of annual raises.
So, what kind of increases are local organizations projecting for 2008?
As in previous years, companies continue to plan for modest pay raises for the next year. However, as in past years, companies will continue to shift their emphasis to performance incentives and total rewards.
According to a recent Wage, Salary, and Employer Benefit Survey conducted by Integrated Employer Resources, LLC (www.ieronline.com) of Tampa, Florida, in 2008:
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37% of those organizations that participated indicated an average wage increase of 3.1% - 4.0%;
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33% of those organizations that participated indicated an average wage increase of 2.1% - 3.0% ;
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16% of those organizations that participated indicated an average wage increase of 4.1% - 5.0%.
Therefore, it is wise for organizations to access local wage, salary and benefit data to make sure that their compensation and benefit offerings keep them in line with not only their direct competitors, but just as importantly, the local market that is vying for the same candidate.
 About the Author
Eduardo Suarez-Solar, MMS. MPA, JD, SPHR is a practicing Labor Attorney & President /owner of IER - Integrated Employer Resources, an organization known for combining their legal backgrounds with practical HR and business experience to develop practical solutions for real-life workplace issues. You can contact Ed at www.IERonline.com or 813-289-6508
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