What Are The Five Things You Need To Know To Design An Effective Employee Compensation Plan?
I remember having breakfast with the Chairman of the Board of a startup. The Chairman was trying to convince me to join the company as CEO.
I’m not sure how we got on the subject, but we started talking about compensation. Mike proudly told me about when he was CEO of a well known public company in my space (analog ICs) that he posted all his employee salaries outside his office.
Mike went on to say that posting salaries eliminated the problem of employees wondering what other employees make. He said that before he posted the salaries, there was a lot of fighting.
I understood his logic, but I cringed at the same time.
I was cringing because I thought Mike was infringing on his employees right to privacy. I also think he solved the wrong problem.
You’re always going to hear some complaining about how much someone is making. That’s normal. However, if there’s too much complaining, you’re likely not following the six rules of effective compensation plans I’ve outlined below:
A. You should compensate your employees at the market level.
Let’s look at the two extremes of bad compensation plans. The first is that you are paying well below market salaries, and the second is you are paying at the top of market salaries.
You will not attract the best people if you are paying below market compensation. Remember, top talent has many options.
You’re likely attracting mercenaries if talent only joins your company when you offer compensation at the top of the range. The problem your mercenary talent will move on when another higher offer comes along.
By the way, compensation also includes the titles you give people. If you give someone a title they don’t deserve, that’s going to come back and bite you too.
You want to be center cut. Assuming you have a great story to tell, you’ll attract great people to your team.
B. Your employees will talk with each other.
Mike, the Chairman I spoke about before, was right in that your employees will talk to each other. And that’s okay, and it’s to be expected.
But it’s much better that your employees decide what they want to share about their compensation than you deciding for them. It’s their decision, not yours.
And, as long as you follow this next rule, you have nothing to worry about, and that rule is…
C. You need to be consistent.
You’ve likely been in a situation where two people with almost identical skill sets were compensated completely differently in the same company. That’s a morale killer, and that is one of the possible problems Mike had in his company.
Yeah, someone may be pissed that they’re making a little less than someone else. Again, that’s to be expected. As long as you are paying people consistently within a range than you’re fine.
Your compensation plan is another way you build trust with your team. If your compensation plan is consistent and fair, then you will built trust with your team.
This leads to my next rule…
D. Correct your compensation mistakes before the market does.
I had two manager level employees that were just killing it. It was obvious that they were operating at a director level, if not VP level.
They were being underpaid by a considerable amount. I could have waited 9 months for their reviews to come along, but I decided to take action immediately.
I promoted them to director level (remember that titles are part of your compensation strategy) where they deserved to be, and I increased their salaries accordingly.
E. Compensation is more than just a salary.
Yes, we already spoke about titles being part of compensation. Remember that your benefits package is also part of your employees compensation too.
Having a great benefits package gives your employees great medical and dental coverage, and is a great way to convince an employee’s spouse that joining your company is the right thing to do.
And don’t stop there. Keep the employee cost of the benefits package low. Low cost plus great benefits is a winning combination for employee retention.
For more, read: Why Can’t You Hire Engineers For Your Startup?