Some Different Ideas on Compensation

Jan 14, 1999

With the tight market labor, Gen-X employee turnover, inefficiency from internal competition, and record backlogs of project work to be completed, it may be time to take a hard look at your compensation policies and practices. Where is it written in stone that once a year is the best timing for salary reviews? Or that paying everyone overtime is a good idea? Or that bonuses should be entirely individual-performance based? Or that salary changes should be based on performance reviews? Or that all employees, even hourly ones, should participate in the bonus plan? Or that bonuses should come at year-end? These and other assumptions on how compensation should be handled cause big problems for A/E/P and environmental consulting firms. Yet, most firms aren’t even considering changing how they set salaries and bonuses! Here are a few ideas for you on how to make your compensation scheme more attractive for both new and existing employees, drive down turnover, and reinforce cooperation: Salary change frequency. Review salaries at least two, and ideally, four times a year. Younger people need more frequent reinforcement and more chances to see their pay rise than do those who have been around a while. They are constantly comparing themselves to their peer group in other industries. And they will move on if they don’t feel they are getting ahead. That means that you have to look at them more often and adjust their pay more often. And there’s no rule that everyone has to get a raise every time. But don’t just allow open-ended pay raises. Set a budget for increases over the year and hold firm. It should probably be between 4.5% and 5% of raw labor in this market. Salaries or bonuses for incentives? Be sure, within any given position category, that you recognize major differences salary-wise in your best people versus those you could afford to lose. Because all too often, A/E/P and environmental firms tend to pay everyone about the same salary, then try to make distinctions between the best and worst performers through the bonus plan. And this may be the worst thing you can do! That practice makes the best people take all the risk for the firm’s success— if the firm doesn’t make any money, they take the hit before the duds! That’s hardly fair. It also allows management to think that their job is done— they discriminated between the high and low performers, and that’s good. But management’s real job is to straighten out the non-performer or low performer, and just paying them differently through the incentive plan may in fact de-motivate them and make them even worse performers! It’s a tough issue. Salary versus bonus pay. Some firms pride themselves in having below-market salaries so their break-even is low and they always make a profit. This allows them to weather the low-performance storms that every firm runs into at one time or another. The fact is, this practice can be a real barrier to recruiting. And it can make your existing people easy targets for your competitors to pick off just like shooting fish in a barrel. Other firms set their salaries so high— particularly those of their owners and top managers— that there’s no way the firm can make a profit. This distortion then causes them to seek out cost-cutting remedies (other than cutting their own pay, of course), which leads the firm to reduce its production capacity and drive up its overhead even further in the long run. This all hurts profits. Salaries of new employees versus current employees. Only a fool would deny that this is a problem today. But you may need to pay more for a newcomer, as much as I hate to admit it, if you want to get this person in the door. That means you better be hiring a superstar, at least on the surface, so you can justify it to your people. The word will get out (on who makes how much). You also ought to go to great lengths to bring the best of the rest of your staff up to speed salary-wise quickly after the new person comes on board. You need to remind yourself why you are going outside to hire someone (i.e., you don’t have what you need in-house right now, therefore the comparison may be one of apples and oranges). Last, you may need to use signing bonuses as a means of keeping salaries down. But they are costly to your cash flow! Bonuses based on individual performance. I would rather pay out a percentage of profits to all salaried employees myself than try to recognize individual performance through some subjective bonus plan (or a subjective one disguised as objective based on some contrived performance “criteria” such as “company spirit”). The higher performer will have a bigger salary and get a bigger share of the pool. And I won’t waste much time administering this program, either, since it is formula driven. Cash profit or accrual profit for bonus calculation. Any plan that pays out strictly based on accrual profits is subject to manipulation by employees. I would calculate profits based on cash P&L. This encourages everyone to do the right thing and collect the money that’s owed. Originally published 1/4/1999

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