6 ways to design a strong benefits and compensation program
In any organization, a compensation program has the potential to positively influence everything from employee behavior to strategic objectives. But to realize that potential, you need the right approach. Here are six ways to design a compensation program that delivers the greatest value to your business.
1. Define your compensation philosophy
Before deciding on a compensation program, your company should define its compensation philosophy and articulate it with a clear, focused statement. Not only will this guide your decisions about hiring or promoting employees, but it will help solve for problems that may arise when implementing your program.
When writing your statement, consider questions such as:
• What do we want to pay for?
• How do we want to pay for it?
• What is our competitive posture?
• How will we split up the pie?
In addition, consider variables such as industry standards, growth strategy, pricing structure, market share, corporate culture, and the values and beliefs of your CEO or management team.
2. Link compensation to business strategy
Design your compensation program to reward behaviors that advance your company’s strategic objectives. For example, if a young company wants to ramp up its market share, its compensation program should reward employees who bring in new customers or clients. If a mature company wants to strike a balance between growth and profit, its compensation program should equally reward activities that generate growth or profit. If a company identifies world-class customer service as a strategic goal, its compensation program should reward activities that lead to outstanding customer service.
Remember that your employee rewards don’t necessarily have to be cash. Many employees value other perks, such as paid time off or benefits that support a work-life balance.
3. Consider your culture
A compensation program can effectively reinforce your company’s culture, and vice versa. It sends a powerful message to your employees about who you are as an organization, what you value, and what skills and results you reward. As a result, it’s important to ensure that your culture and compensation program work in sync and complement one another.
Note that, if your organization is interested using compensation plans to change employee behavior, compensation alone won’t generate the results you want. To create permanent behavioral changes, you must first change the culture and the environment and then use compensation to reinforce those changes.
4. Connect value creation to compensation
In order to reward behavior that drives results, you need to know what creates value in your company — both from the perspective of your employees and your customers. This value can be measured qualitatively (e.g., you’re solving a problem for your customers) as well as quantitatively (e.g., your goods or services are generating revenue).
To get your customers’ perspective on value, consider calling your top 20 customers and asking them two questions: One, what are we doing now that is creating value for you and makes you feel good about doing business with us? Two, what can we do to earn more of your business?
Next, look internally to see who is creating value on the financial side. Every employee must do at least one of two things: create or support sales (revenue side) or keep expenses to a minimum (expense side). If you find an employee who isn’t doing either one, you should question whether their function should continue to exist.
5. Market your total compensation package
Most employees think of compensation as base pay. They forget — or are never told — that anywhere from 30 to 50 percent of their total compensation comes from other areas, including:
• 401k or profit sharing
• Retirement and pension plans
• Stock or equity
• Incentives and bonuses
• Recognition and rewards
• Vacation and personal time off
• Opportunity income (e.g., tuition reimbursement, professional development programs)
In order to attract and retain top talent, you need to market your total compensation package. One way to do this: On an annual basis, give your employees a “total compensation statement” that breaks down all of the rewards and benefits that they receive for working for your organization. Most employees are surprised when they see the bottom line; it almost always exceeds what they normally think of as their compensation.
This can also come in handy when a competitor tries to lure away one of your employees with promises of a bigger base pay. If your employee understands the full range of compensation and benefits that they enjoy at your company, they will be better equipped to evaluate offers from potential employers.
6. Measure your return on invested payroll dollars
How do you know whether you’re getting a good return on your invested compensation dollars? Simple: Measure it. To do this, first decide what you want to examine — whether that’s productivity, bottom-line results, employee turnover, quality of customer service, or your ability to hire and retain top talent — in the context of your overall business strategy. Then start tracking them and see whether the return on your compensation dollars matches your expectations.
This article was originally written with input from human resources and compensation experts Ron Fleisher, Catherine Meek and Karen Jorgensen.