Ropella

Growing Great Companies

 

Choosing an Effective Compensation Plan

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Variable Compensation

In this model, employees are paid a below-average base salary and can earn additional bonuses by meeting or exceeding set goals. In many companies, employees are given 75-90% of market compensation. They are then given individual, departmental and corporate goals. If these goals are met or exceeded, the employees can earn above market compensation.

Pros

  • Employees see a direct correlation between their performance and pay.
  • Employees generally work together more effectively in order to meet departmental goals.
  • Provides a personal connection between the employee and the company’s goals and success.
  • Allows top performers to achieve above market compensation.

Cons

  • When the economy is down or the company is under performing, it may be impossible for employees to meet their goals, therefore compensation lags and morale can become a problem.
  • A fairly complex system must be created and maintained in order to measure goals. In some instances complex computer tracking may be needed.
  • May be difficult to separate team and individual performance and awards.

Profit Sharing

Perhaps one of the most popular trends in competitive markets like the chemical industry is profit sharing. In this model, employees are paid a base salary, and receive profit sharing on a quarterly or annual basis. It is most commonly given only to full-time employees, and takes the form of either stock options, pre-tax dollars contributed directly to a 401K plan, or a bonus check. Generally the company will contribute a percentage of its earnings to a profit sharing pool, and divide it among the staff on a pro-rated basis according to the base salary of each employee.

Pros

  • Unites the staff with a common goal to work toward.
  • Encourages employees to think about the “big picture” and focus on company profit.
  • It is a safe alternative to other incentive plans, as it is directly tied to profitability. If the company has a slow year, the payout to employees is smaller.

Cons

  • It is tied to base salary which may cause a division among the ranks.
  • It does not take into consideration individual performance or goals.
  • A small payout can trample expectations, and have an adverse effect on morale.

Benefits Package

Benefits Packages

Another entity of compensation packages that is becoming more progressive is benefits. The trend is moving toward more choices for the employee and diverse plans that cater to a growing need for a work-family balance. In addition to the standard health, life, dental and eye insurance, some companies are now offering discounted health club memberships, commuting cost reimbursement, and funds for dependent care. Rather than offer a fixed plan for each employee, some companies set aside a specific dollar amount, and let the employee custom-make their own plan.

Two important things to remember when choosing options for benefits packages are:

  1. Choose benefits that will provide a decent return on your investment. For example, offering on-site flu shots and smoking cessation classes could reduce sick time and medical claims over the long run.
  2. Find out what’s important to your staff so that you’re providing them with options they want. Conducting an informal poll will give you the information you need.

Which system is best for your company goals?

Finding an effective compensation plan for your company means that the plan must work equally in favor of the employee, as well as with the company’s overall goals and purpose.  Every company has its own unique products, people, and processes. What works in one organization may not work in another. Although there are pros and cons to all of the plans presented above, finding something that works for you and your staff can mean the difference between an average year and a stellar year.

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