10 Things Every Employer Should Know about Compensation Systems

I was with some small business owners recently who were trying to establish formal, equitable compensation systems for their companies. As a result of our conversations, I came up with some suggestions that every employer, regardless of the size of his/her organization, should consider.

1. Align pay with organizational goals.

Make sure that the things you are rewarding support the organization’s mission and goals. For example, if you want employees to act as a team but you pay them based on their individual performance, guess what you’ll get?

2. Make sure you communicate the message you want your compensation system to send.

Every compensation system sends a message to employees. Make a conscious decision about what message you want to send, and ensure all elements of the system are aligned with it.

3. Think broadly.

Define “compensation” as including more than just pay and benefits. I encourage my clients to include everything that rewards or recognizes employees for their performance.

4. Leverage the power of recognition.

In my experience, recognition unfortunately is a “best kept secret.” Find out what non-monetary forms of recognition are meaningful to your employees (e.g., autonomy, challenging work, the ability to learn new skills) and incorporate them liberally into your total rewards system.

5. Connect rewards with performance that employees can control or influence.

Few things are more de-motivating to employees than being offered rewards for achieving outcomes over which they have little or no control. You are better off not offering any reward at all.

6. Watch the timing and form of rewards and recognition.

Desired performance should be rewarded as quickly as possible so employees see the cause-and-effect relationship, and are more likely to repeat the behavior. Annual bonuses, such as profit sharing plans, are notoriously ineffective in helping employees make this connection (except possibly at a senior level).

7. Establishing a clear line-of-sight is priceless.

You have established a clear line-of-sight when every employee is able to articulate clearly the contribution he/she makes in achieving your organization’s mission or goals. When this happens, you will have a workplace in which people are engaged, motivated, committed, creative, and have high morale. Money cannot buy this type of environment.

8. Ensure the compensation system is procedurally fair.

Managers often cannot control the outcomes of the compensation system – i.e., the amount of pay they can provide. However, there is one key factor over which they always have control, namely the process by compensation is determined. When employees perceive that the process by which they are paid is fair – i.e., it is transparent, free of bias, and allows for their input – they will accept the outcomes even when they are not entirely happy with them.

9. Formalize the system, then don’t mess with it.

Once you have established your pay structure(s) formally and identified clearly how and when pay and other forms of rewards will be changed, do not change it arbitrarily. Your compensation system is a reflection of management’s strategy and its philosophy about how it values its employees, both of which should be relatively stable.

10. Implement an excellent and measurable communication plan.

No compensation system can succeed without a clear, concise, and comprehensive communication plan. Two measures of such a plan: (1) every supervisor and manager is able to explain it accurately and clearly to their staff, and (2) individuals can articulate how and on what bases they are rewarded and recognized.

© 2010 Pat Lynch. All rights reserved.

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