Deciding how to compensate your employees and, if you have partners, how to structure pay between them equitably is a topic of interest for our business owner clients. In this article I’ll touch on some of the important criteria from the EMyth perspective, helping you understand this critical component of your company.
Important fundamentals of equitable compensation and fair pay
Naturally, this is about striking the right balance. When you pay too little, you can have difficulty hiring and run the risk of losing employees.
Paying too much can waste valuable resources. Smart compensation starts with budgeting. You need to determine what you can afford to pay and what you need to pay in order to remain competitive in the marketplace.
Next, think position contracts or agreements. If you haven’t adequately defined the position, how can you even consider compensation?
At EMyth we strongly believe in creating a contract for the position, not the person who will be occupying it. In the same vein, the compensation should be for the position and not for the particular person who is presently filling it.
Now let’s consider compensation for partners. The EMyth perspective on this is clear: owners should occupy positions in the organizational structure and be compensated for that position with the same pay you would provide an employee.
In this way, if the time arrives for you to replace yourself or one of the partners in that particular position, the salary is in the budget and makes sense to the overall business organism.
Partners are fairly compensated for the work they do in the organization, and whatever profits remain can either be re-invested in the business or split among the partners according to the appropriate percentages.
Right pay for equitable compensation
So how do we arrive at the right pay rate for each position? There are two basic methods: either internally ranking the positions in your organization in relation to each other or structuring pay according to the market pay data.
With certain high-demand positions such as software developers or specialized marketing managers, the use of market data is critical to competitiveness and attracting quality candidates.
These days, many companies use a combination of both methods to arrive at the right pay structure.
Through what is called “strategic work valuation” they look at both the market pay rate for the position and the value of the position’s contribution to the organization. In this way, pay can be linked to the relative competitive nature of the marketplace as well as to the specific organizational objectives that are important to your company.
There are many web resources such as Salary.com that provide external salary information.
You can also do informal surveys of other business owners. Internally, rank the value of each position and place them in relationship to each other based on how they contribute to the overall achievement of your strategic objective.
Fairness is critical in creating a good compensation structure
Most importantly, your intention should be to develop a pay structure that is fair both internally and externally. Internally you want fairness between employees and externally you want to be aligned with other businesses.
Failing to consider these can lead to a drop in employee morale resulting in lowered performance, less employee engagement, absenteeism or leaving the business.
And if you become known for a poorly paying environment, your recruiting process becomes much more difficult.
The EMyth model of clear expectations through position contracts, systems, and articulating the “rules of the game” suggests that we can often hire someone with less tenure and skills because we have processes to train and mentor such employees to the level of expertise other businesses often demand.
Once the employee is up to the higher skill level, however, it is important to remember that external equity becomes increasingly important to retain that employee.
Once you’ve arrived at base pay figures, next consider what you want your compensation package to reflect about you and your business.
In addition to pay, here we’re talking about benefits, not just health, but child care, longevity bonuses, 401K, flexibility, job security, opportunity for growth, praise and recognition, task enjoyment and other perks of your particular company culture.
All these extras both compensate and demonstrate how we value our employees. In a competitive job market, indirect compensation becomes increasingly important.
If you can’t compete with the top wages, you may find that you can offer individualized alternatives that meet the needs of your candidates and employees.
Often, small businesses can find ways to creatively compete with larger companies through such indirect compensation alternatives.
In some fashion, and recent studies back this up, you most likely want to tie some part of pay to performance.
But this can’t be arbitrary; to be successful, you must find tangible reflections of what an employee can influence and base performance objectives on these indicators. Bonuses for production and sales, tenure, maintaining equipment, customer service quotas, or even bonuses for arriving at work on time are all valid, but each one should reflect your company culture and be equally distributed throughout your organization.
The more you quantify and measure, the easier it is to create such incentive targets. Failure to pay based on performance is one of the biggest reasons companies fail to make a profit.
Extraordinary performances should be paid well, while those in the middle should be mentored and receive incremental incentives to reach their peak performance level.
Employees who can’t keep up will often leave such an environment, while good workers prefer pay for performance since it rewards them to excel. Remember: what you reward gets done.
Structure pay through a system
Like so many strategies and activities in your business, look at structuring pay as a system. First strategically decide the primary purpose of your compensation package. Is it to recruit new employees, motivate and retain current ones, reward good performance, or to build employee loyalty? Or do have your own original idea about the way you do it in your own company? Next, determine your internal wage structure through your chosen method of looking at both internal and external equity. Talk to your employees about their indirect compensation needs, and structure your performance-based reward system.
Implement your new system through clear communication of both its philosophy and structure as employees always feel more secure and fairly treated when they understand your compensation policies. Finally review your system periodically, maintaining flexibility to innovate, and continue balancing the key parts of internal and external equity along with performance incentives.
Share your story
What’s has been your experience with creating a pay structure? What would you do differently after reading this article?