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Entrepreneurial Companies Need a Compensation
Strategy
Business owners have a focus on the enterprise itself, and can sometimes
overlook the simple fact that their team members are there for the
purpose of earning an income, not growing a business. However, the
income a business owner receives has a lot to do with the performance of
the employees and therefore is important to the success of the business.
Entrepreneurs can be influenced
by their company’s position at a given point in time and be either
generous or parsimonious depending on how much money is in the bank.
Their employees have a different perspective and expect employment
conditions including salaries to be related more to market conditions
and the cost of living than their employer’s welfare.
A Compensation Strategy can be Good for Business
Having a compensation strategy
can stabilize things like rates of pay and keep morale and performance
on a more even keel than if remuneration is based on the owner’s
emotions.
Naturally, there is always going to be a correlation between the
revenues of a business and the amount it has to expend on salaries and
salary increases. This doesn’t mean, however, that the priority the team
members give their own welfare can be overlooked or ignored.
If a top performing team member leaves the business for a better-paying
position, the costs of the subsequent recruiting process will quickly
show that you probably have to spend more to replace them than it would
have cost to retain them.
Furthermore, the salaries paid to people in certain key positions become
reference points for downstream positions in the business. If the amount
paid the new-hire is noticeably different from the salary of their
predecessor, this can create pressures for increases from a number of
other members of the team.
Budget for Increases and Incentives
Just as wages are a budget item, it’s equally important to have an
amount of money allocated for pay increases. This can be a fixed
percentage of the wages budget that is in addition to it, set aside to
be used at management’s discretion to reward outstanding performance and
as a recruitment incentive if needed. It can also be used defensively,
to retain a key person who’s being targeted by a competitor.
Determining those whose performance is outstanding is a management
responsibility. Each position should have its own performance indicators
that can guide management in its remunerations decisions. Standards used
to evaluate performance need to be both realistic and applied in a
consistent way.
This means that to some degree it is usually necessary to distribute the
amount allocated for pay increases unequally so that it motivates the
firm’s top performers. However, it is just as necessary to ensure that
the process for determining compensation is the same across all parts of
the business.
Cash is Still the Preferred Incentive
According to a recent PricewaterhouseCoopers Trendsetter Barometer, cash
incentives predominate as the form of compensation used by the
fastest-growing private companies in the US. Cash-based incentives, can
include awards for long-term performance, bonuses, commissions and other
components.
However, there are additional non-cash ways to compensate team members
that can also be used to great effect, but must be incorporated into the
annual budget. Travel, entertainment and even training can all be
included as part of the businesses’ overall compensation strategy, and
these can bring benefits to both the employee and the business if
applied correctly.
Equity Participation May be the Answer
To reward really outstanding performers and encourage them to remain
with the business some form of equity participation may be offered. Just
as with other non-cash kinds of remuneration, this shouldn’t be seen as
a substitute for cash but rather as a form of ‘performance bonus’.
It should also be noted that changes to the legal and taxation
environments in some countries have made offering equity participation
to employees a much more complicated form of reward than it used to be
and legal advice should always be sought before such offers are made.
Owners seeking sympathetic treatment from their team members when it
comes to the quantum of the increases would be well-advised to keep
their employees in the picture about the company’s economic fortunes.
Always keep in mind when designing a compensation strategy for your
business that there have been a number of recent lawsuits about the
design or the implementation of a compensation plan, often after the
termination of an employee.
Help employees understand that
their jobs are a part of the company’s overall activities and how the
business needs to follow a budget while it operates. Keep them fully
informed and they’ll be more likely to see your point of view when
things get a bit tough.
And be sure that your compensation strategy complies with all applicable
legislation including those covering such areas as wage and hour
obligations, commission payment obligations, minimum wages and equal
pay.
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