How Do I Design a Compensation Plan?

How Do I Design a Compensation Plan That’s Customized to My Organization? In a previous post "Customize Your Compensation Plan for Your Organization," we shared the first three of six tips from HR expert Stacey Carroll, MBA, SPHR, on how to design a custom compensation plan so that your organization stays lean and competitive. Here are the final three tips, as explained by Ms. Carroll, which deal with merit increases, budgeting and compensation plan design.

August 18, 2010

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How Do I Design a Compensation Plan That’s Customized to My Organization?

In a previous post “Customize Your Compensation Plan for Your Organization,” we shared the first three of six tips from HR expert Stacey Carroll, MBA, SPHR, on how to design a custom compensation plan so that your organization stays lean and competitive. Here are the final three tips, as explained by Ms. Carroll, which deal with merit increases, budgeting and compensation plan design.

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4. Eliminate across-the-board pay increases.

My whole mission as an HR educator could be to help every organization eliminate across-the-board increases. An organization may have a moral reason for giving across-the-board increases, but I cannot think of a good business reason. Your employees are paid differently and should be. Where you target the market should be different based on the value the position has to the organization. And, increases given to get people where you want them should be varied. They shouldn’t be across-the-board.

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What you’re going to do with across-the-board pay increases is perpetuate what you have today. If you have a perfect, seamless system, do an across-the-board increase. But, guess what? Even that won’t work because the market has changed disproportionately in the time since you last set salary numbers. A flat approach simply doesn’t make sense in reality.

5. Ask for the compensation budget you need.

As you look at your compensation budget more strategically, some of the increases you’re asking for may be pretty large and shocking to your CFO. In that case, think about prioritizing your requests. If you are far off from where you want to be, how do you prioritize what gets done first?

The answer to this question involves business savvy about which positions are most valuable to the company, people savvy to know where people are in the company and market savvy to know how fast the market is moving. For example, an employee with an additional year of experience is more valuable to the company and should be rewarded appropriately. The market will tell you that.

You have to be able to prioritize your requests based up on your knowledge of your segment or industry. You have to make decisions that help you keep the people who are most valuable to your business. Can’t give a raise to everyone? Of course. Have limited resources? Who doesn’t? But, can you afford to not do it for anyone? That’s is the question I challenge you to think about.

6. Design compensation plans (incentive plans) that are in alignment with company goals.

Let’s pretend that you are charged with designing a compensation plan for a company that is trying to grow fast and is cash-sensitive. So, you are in high-growth mode, trying to make it in tough economic times. What would you base your sales incentives on to design the program that is sensitive to company requirements?

Profits vs. revenue – Your goal is increasing profits. That’s very different than increasing revenue. I bet there isn’t a sales person out there who couldn’t increase revenue on an unlimited budget. But, increasing profits is about increasing revenue while holding down costs. That way your profitability grows. If your sales team has any leeway with how they spend company money, you need to incentivize them to focus on profits.

New customers versus retention – Will you incentivize renewal and customer retention? Any business person will tell you that getting new business is one thing but retaining that business is a whole other process. And, it’s often a lot cheaper to keep the business that you have than to go out and get new business. Can you design some incentives, even for new business, that reward people’s renewal rate year-over-year? Remember, whatever you incent is the behavior you are going to get.

Customer payment terms – Think about how to incentivize your sales team to get what you want, which is cash in the door. Create incentives that reward sales people for customers who pay up front.

Final design – Pay commissions upon receipt of customer payment and/or delay commission payments quarterly. One of the challenges in a cash-sensitive business is that if you have deals coming in the door and you’re paying out commissions, but you haven’t captured the cash yet, that creates a tough situation. This suggested approach is one example of taking business priorities and applying them to your compensation plan design.

Regards,

Stacey Carroll
Director of Customer Service and Education
PayScale.com

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