Employee compensation is a powerful performance strategy, if used wisely. Compensation decisions are often made when new employees are being recruited and include some “negotiation” where each side has different objectives:
- Employers want the best available employees without overpaying for wages or salaries. “Hire high, don’t overpay.”
- Employees want the highest possible salaries or wages from good employers with reasonable expectations. “Earn high, don’t overwork.”
Fixed Compensation Disadvantages.
Many employers still use a traditional approach to compensation with little connection to organizational outcomes. The disconnect begins when a fixed compensation amount is negotiated up front, even though both sides know relatively little about each other, how they will work together, and most importantly what results they will achieve. Often, these compensation agreements remain intact for months if not years and there are no good mechanisms to address below-average or above-average performance. Many employees have very little accountability to achieve results and compensation is inadequately managed through an uncomfortable annual employee performance review.
Find a Better Way to Pay.
The stakes for everyone are too high to not use compensation wisely. The best employers are willing to pay up for productive workers that satisfy their stakeholders. The best employees will gladly offer their time and talents to employers that reward their effort and results. But compensation that is fixed and decided upfront is inherently flawed in many situations.
What if both employer and employee were willing to accept a different and potentially much-better variable approach with a fixed “base pay” amount and a variable “incentive pay” portion? This idea is not new, but surprisingly little-used (or even considered) in many employment agreements. Using a simple “base plus incentive” approach, employers can gain a mechanism to pay high-performing employees more and under-performing employees less, contingent on a mutually agreed upon compensation formula and performance results.
Employers, variable compensation requires some upfront planning, communication, and a little math, but it could be a much better use of your hiring resources and payroll dollars. Replace your outdated fixed compensation plans with more flexible and rewarding variable compensation methods and see how you can recruit, hire, motivate, and retain a more talented workforce. Then watch them deliver much better performance results.
Rob Marchalonis is the founder of LSP123 LLC and author of IncentShare: Motivate, Recruit, and Get Results with Incentives, now available at Amazon. Connect with him at LSP123.com or www.IncentShare.com