Santa, Scrooge and Well-Designed Compensation Plans

Nov 14, 2019, Written by Jim Miley

Ranking employees as the most important and valuable asset is nearly universal in the business community; therefore, it stands to reason that business leaders also place employee engagement high on their list of priorities.  We want our employees to perform well and we want them at the least satisfied with their employer.  

While compensation is one of many ingredients in the recipe for employee satisfaction and performance, it is a big influence so merits a business leader’s appropriate attention.  

So many businesses I’ve encountered over the years have what came to be called the “Santa Clause Pay Plan.”  Very little definition to exactly how or why employees received pay raises or bonuses other than the boss, Santa, was in a good mood or felt he had a good year.  Stay on the owner’s good side, off the naughty list, and hope for a good Christmas.   

Many business leaders do not have a clear and concise business answer to the questions, “why do you pay your employees,” or more specifically, “what do you want your compensation plan to accomplish?”  

Why Do You Pay Your Employees?

My first recommendation is if you don’t have clearly defined objectives for your compensation plan, develop them.  To fully accomplish any set of objectives, you must have clearly defined the objectives. If you don’t know where you’re going, how do you know if you get there?  

For housekeeping I feel I should note that there are many factors that drive your employee behaviors and job satisfaction and there are even more opinions about how much of a factor compensation is relative to how an employee feels about their job.  I’m not making an argument over how much of a role pay plays in employee satisfaction, but am simply stating compensation is very significant issue for your team so demands you consider your pay plans carefully.    

For the purpose of this post, the Compensation Plan includes base pay, bonuses/incentives and any defined benefits with a specific monetary value.  

Here’s an example of how you might answer the question, “why do you pay your employees?”

The compensation plan will provide market competitive pay and benefits to support employee loyalty, an engaged workforce and long-term health for both the employees and the company.  Bonus and incentive benefits will be utilized to drive key areas of focus or specific business initiatives. 

Test Your Company Compensation Plans

Once you have a reasonably solid description of why you pay your employees, you can begin evaluation of whether your compensation plan consistently accomplishes the defined objectives.  

Gather market information about the positions you employ.  What are your business peers doing with compensation? How much are similar positions paid and what is included in the compensation plans of other companies; health benefits, bonuses, paid time off, etc?  

There are many sources of information from which you can draw to test your own pay plans.  Internet job boards are an easy and readily available place to find good data. Prospective job seekers are another good source of information of pay rates and benefits from industry peers.  You should always be gathering intelligence to stay current and continuously monitoring the strength of how much and how you pay your single most important and valuable asset.  

Base Your Compensation Upon Intelligent Design

Once you have defined what you want to accomplish with your company compensation and checked the market for what peers in your business environment are doing, apply some intelligent design to build an effective compensation plan.  

Design your compensation plan to accomplish the objectives you laid out in answering, “why do you pay your employees?”  

Your pay plan should help you manage your business and encourage the performance that matter to the business overall and that matter all year long; not just at Christmas time.  

Getting into the details of any given compensation plan is beyond the scope of this post, but I’m happy to share thoughts on evaluating yours if you have questions. 

The main point I’m making here is that you should view your company compensation plan holistically, considering market conditions and accomplishing defined objectives that move the business toward its’ objectives and desired results.  

Don’t Be A Scrooge

Some approaches to compensation can work against the company objectives.  

If your compensation plans, especially pay raises and incentive/bonus payouts, are not well defined with clear understanding by your employees, they may actually discourage the team.  

A given employee may have performed well for the majority of the year, hitting all their objectives and delivering solid results over the total body of work; then the dreaded year end drop off comes with holidays and vacations or maybe even a little temporary seasonal slump in the economy. Some business leaders / owners may not feel so optimistic about raises and bonuses.  Santa is back to being a mythical figure while Scrooge sits down at your desk. 

It’s hard to be objective regarding raises or bonus payouts if the criteria are not well defined or results are hard to measure.  If an employee has had a rough spot with you recently or if business is a little rocky at the moment, you may feel like Scrooge is just making some hard but necessary decisions.  

Pay plans that are arbitrary or overly subjective are often bad for employee moral and make it harder for you to accomplish the results you desire for the business.

Build a Well-Designed Compensation Plan

Some business owners have the notion that their business is too small to put that much thought into compensation.  If you are one of those owners, I encourage you to consider the benefits of a compensation plan that by its’ design, improves employee engagement and motivates your employees to accomplish your top priorities.  

Three simple steps to start your compensation plan design:

  • Use a formal performance management process to determine qualification for raises.  Complete at the minimum a full annual performance review based upon well-defined and measurable criteria.  More frequent reviews are better but I’m keeping it simple in this post. 
  • Establish the criteria for bonuses or incentive qualification at the beginning of the business year.  Publish the criteria for bonus qualification to the employees.  
  • Make sure the criteria you establish for bonus or incentive qualification is based upon your top priorities for your business.  The criteria should reflect successful business performance which also helps to fund the bonus payout.

You also need to take inventory of any benefits you provide that have a monetary value such as medical coverage or paid time off.  Review those values with your staff at least once per year.

Make a summary of the total compensation for each position in your company to share with the employee so they are aware of their total compensation in its’ various forms.  You also use this summary to compare your company pay against the intelligence you gather on what industry peers are paying.  

For your compensation plan to accomplish the objectives you outlined in answering “why do you pay your employees,” you need to be able to benchmark what and how you pay compared to other employers competing for your employees.  

If you haven’t invested the time to build a well-designed compensation plan, don’t feel like it’s not necessary or too much trouble.  

A well-built pay plan for any size business will pay dividends in productivity, employee engagement/satisfaction and business results.  

Put a Well-Designed Compensation Plan on your Christmas list.  

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Jim Miley

As a Business Coach, Jim brings a broad background of operational and sales management skills and expertise to help small business owners grow their business and reach their highest potential. He has 30 years of field-proven professional experience.