Now here’s a subject that everyone’s interested in: compensation! Whether you’re the owner, boss or the employee, how much you pay, or are paid, is very important. In this article I’d like to share some compensation philosophies and strategies.
Employee compensation packages are one of the main engines that drive your business. If your company is like most, it’s an expensive engine to maintain – probably your number one expense.
For small businesses in America, total people costs are between 50% and 60% of their total operating expenses. According to NKBA’s last Dealer Profit Report, average total payroll expenses were 56.4% of the total operating costs. What’s yours? Be sure to add in all related people costs: salary, commissions, bonuses, benefits, taxes etc. (including the cost of paying the owners).
Payroll is more than simply an expense. How much you pay your employees and what factors you use to establish pay scales and award bonuses can profoundly affect the quality of your work force. Equally important, this can affect your ability to attract and retain productive, reliable employees.
The questions people keep asking me are:
- What pay structure do you recommend (salary, straight commission or a combination of both)?
- If commission, is it paid on sales, gross profit or both?
- How much should you pay a sales/design person? (productivity has a lot to do with this)
There is no one right answer to these questions, though there are some guidelines and perimeters that you can use.
LANGUAGE OF COMPENSATION
First, let’s go over the basic language of employee compensation.
- Compensation – all the “rewards” employees receive in exchange for their work, including base pay, commissions, bonuses and other incentives;
- Base Wage and Salary – the salary or wage employees receive before deductions or other incentives;
- Incentives – special rewards such as commissions, bonuses, spiffs, profit sharing, etc. that are offered in addition to base wage and salary;
- Benefits – special “rewards” offered to employees in addition to base wages/salary and incentives, i.e. health insurance, stock options, pension plans, vacation, sick days, etc.;
- Exempt Workers – employees who receive salaries (those paid a flat weekly, bi-weekly or monthly wage as opposed to an hourly basis)…and who are ineligible – in most cases – for overtime pay;
- Non-exempt workers – full-time and part-time workers who receive an hourly wage. The provisions of the “Fair Labor Standards Act” (FLSA) and comparable state/provincial laws – particularly with respect to minimum hourly wage and overtime pay – cover non-exempt employees. Be sure to check your state/province on the criteria that clarifies the difference between exempt and non-exempt employees. It varies from location to location;
- Commission – A percentage of a price or gross margin earned on the sale of products and/or services. A commission can be the total wages or can be combined with a salary or hourly wages.
SETTING THE FOUNDATION
An effective compensation system is a well thought out set of practices that helps to ensure the following results:
- Your employees receive a fair and equitable wage (from both the owner and employee perspective) for the work they perform.
- Your payroll costs are in line with the overall financial health of your business.
- Your employees clearly understand your basic philosophy of compensation, which has strong support of management and employees.
- The pay scale for the various jobs in the company reflects relative importance of the job and the skills that performing the job requires.
- Pay scales are competitive enough with others in your marketplace so that you’re able to retain and attract employees.
- Your compensation policies (and levels) are in line with state/province and federal laws involving minimum wages and job classifications.
- Your compensation policies keep pace with the changing nature of today’s labor market…particularly in recruiting and retaining knowledgeable and productive workers who are in strong demand.
Allow me to share a personal story on compensation. We started our kitchen and bath firm from scratch. It was one of the first decorative plumbing and kitchen showrooms in the country. We knew we’d have to work long, hard hours in the first few years.
There was very little competition, so establishing a salary program was difficult. Trying to be conservative, we kept our compensation on the low side. Guess what? We got what we paid for – largely unmotivated, unproductive employees – and we were continually replacing folks.
It didn’t take us long to decide that we needed an honest to goodness compensation philosophy and strategy. So we wrote detailed job descriptions and assigned a better than average wage to each position. We learned very quickly that by paying just a tad higher than the going scale, we not only could attract the very best prospects…but once they were hired and trained, they didn’t leave.
So here’s my question to you owners and managers out there: Do you just try to pay the minimum compensation it will take to bring a new employee on board, and then react to wage increases as employees put the heat on? Or, do you have a well thought-out strategy that becomes the basis for your wage and salary decisions?
Following are some questions you may want to ask yourself if you want to develop an acceptable compensation strategy.
- Will you make your pay scale competitive with the going rate, or will you try to pay just a little more?
- Will your try to determine how much each position in the company is worth to the business? Or will you set up salaries on an individual basis, based on the qualities and potential (and demands) of the person filling the position?
- To what extent do the monetary rewards you offer your employees take the form of salary, commissions, performance incentives or benefits?
- Will you base the salaries on how well they perform or on other factors – such as how long they stay with you, or what credentials/certifications they brought to the job?
- Will you award incentives based on individual performance, tie them to company results, or use some combination thereof?
Keep in mind there are no right or wrong answers here. Every situation is different. What’s important is that your compensation philosophy takes into account your company’s mission and strategic goals. If your goal is to be the biggest and best kitchen and bath firm in your area, you’ll probably have to pay a little more in order to attract and retain the best people. If one of your goals is to improve/increase productivity and performance, you may want to build in incentives to reward employees for their individual and/or collective efforts.
My next column will look at specifics of different types of compensation plans. In the meantime, if you have any questions or comments please feel free to contact me at [email protected] or 916-852-6855.