Insights | Dec 11, 2019
By Tom Kosnik
Business owners and managers are never thrilled to make changes to their compensation plan, mainly because they’re in fret of how the change is going to be received by employees. However, tweaking the corporate compensation plan annually at the end of the year is a good practice for any company. A recent Glassdoor survey showed that only 65% of employees were satisfied with their compensation plans. This means that 35% of employees would welcome a compensation alteration. Additionally, the economy, pricing pressures, margins, and wages with both internal employees and temporaries, will rarely stay the same from year to year. Prudent business owners and managers know this and make alterations in their company’s compensation plan to adjust to these external environmental changes. So, as you think about making a compensation change, here are a few things to keep in mind:
Most compensation plans I see are boring. They reward only “lag” indicators and not “lead” indicators. Gross profit production, headcount, and hours billed are all “lag” indicators. These indicators happen as a result of other activities or work in the office. Face-to-face meetings, following up on leads from recruiters, attending networking events, and getting candidate interviews at a client site are all “lead” indicators. We refer to “lead” indicators as “performance drivers.” This is very important, as you must figure out how to reward performance drivers in your compensation plan. Why? Because performance-driving behavior is the most important and critical behavior that will obtain the results a business owner or manager is seeking!
In brief, the closer the financial reward is to the behavior, the stronger the compensation plan. In light industrial staffing firms, many companies will pay commissions in every pay period which is typically twice a month which is generally good. In professional contract staffing firms, many companies will pay commissions once a month. Again, good practice. With that said, I still hear about some staffing firms paying commissions once a quarter. Paying commissions once a quarter is generally a poor practice and ends up being a waste of commission dollars.
Big year-end bonuses for hitting a certain gross profit production threshold at the end of the year is also wasting commission dollars. Instead, consider setting quarterly gross profit production goals. In this case, you have now taken one set of commission dollars (the year-end bonus), which no one is going to look at until the end of November, and have turned it into a commission component that is rewarding and encouraging behavior four times a year.
What percentage of an employee’s total compensation should be allocated to salary and what percentage should be allocated to commissions? Aim for 50/50. That is, 50% of an employee’s total compensation is their salary and 50% is their commission. You want to build your compensation plan out so your solid “B” players fall into this 50/50 pay scenario. Your “A” players should be able to make twice their salaries or even more. And, new employees – if they have the right personality profile for the job and are adequately trained and well managed – should hit a 50/50 pay scenario in about 18 months (some faster, some slower). If not, this is an indicator that something is wrong.
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