How to Set Employee Compensation
Setting your employee compensation and benefits.
How do you determine your employee compensation? Do you just follow a minimum wage law or you have your own employee compensation plan in place?
Before I go fully into this topic, I want to say that the law regarding minimum wage payment should not be followed blindly. The government sets minimum wage in order to provide a benchmark for employee compensation so as to ensure that staff are rewarded fairly. I have had encounter with many sole proprietors who refused to recruit because, according to them, they could not afford to pay the minimum wage. Therefore, they had to keep doing things by themselves. The problem with this approach is that, it may be difficult for the owner of the business to grow the business. Doing it alone has a lot of limitations. No matter how multi-tasking a person may be, he cannot do beyond his ability or what time permits him to do. If there is a task that requires two people to complete in a day, working alone will mean that such task may only be completed in two days if handled by one person. Even the task may even be extended to three days as a result of the absence of the synergy effects of two people working together.
Perhaps you find yourself in this type of situation, this article is to provide you a guide on how you can come up with employee compensation plan that will not be burdensome to you or your business. When we talk about hiring a staff, the only thing that comes to mind on how to compensate employees is the payment of salary. Because startups and small businesses cannot afford to pay huge salary that can attract good talents, they end up hiring mediocre in most cases. This usually leads to frustration. So, let’s look at different ways business owners can determine their employee compensation
Wages and Salaries
This is the traditional way of setting employee compensation and it still remains popular up till now. In this type of employee compensation plan, an employer agrees to pay a specific amount to his employee at a specified regular interval usually on a monthly basis. In this case, the employer is expected to comply with the minimum wage law. Minimum wage is just a benchmark, employer may pay more. The amount to pay is a function of many factors such as the nature of the job; the skills level and experience of the employee, the industry of the business and the financial buoyancy of the company etc. As already mentioned, small businesses and startups usually lack resources to hire or retain good talents. This type of employee compensation plan is not quite appropriate for startups for this reason, except for clerical positions which may not require high skill level or expertise. Another problem with this type of employee compensation plan is that, once a staff is hired, it becomes mandatory for the business owner to pay the salary at the end of each month or as agreed with the employee. Salary payment is a fixed overhead. This means that, whether a business earns revenue or not, the expenses must be incurred. Though the company may not have cash to pay immediately, it becomes a liability that has to be settled. This is the main reason some small business owners don’t like to hire staffs especially when there is no guaranty that their present revenue is sustainable.
Read Also: Tips on Staff Hiring Process for Small Business
Commission
This is close to salary payment but the two are not the same. Commission as an employee compensation plan entails the payment of certain amount to an employee based on his performance within the period. In most cases, commission is expressed as a percentage of sales made by the staff within a specific period. Instead of paying a fixed amount to an employee, the amount the employee receives varies month by month based on his performance. This employee compensation plan is more flexible for employers. However, it is not that attractive to employees except for the skilled and experienced salespersons. In other to make it more attractive to employees, some employers usually split the compensation plan into two. That is, they pay a certain amount as a fixed salary while the other part is commission based. In a situation where the employee does not make much sales in a particular, he is guaranteed of the fixed part of his compensation at the end of the month.
Performance bonuses
This employee compensation plan is like dangling a carrot before someone. Because a small business may not be able to pay a huge salary every month, the owner may decide to pay a small amount as a monthly salary. However, there will be a promise to pay a certain amount or percentage at the end of the year if the staff meets a particular target. This becomes a motivation that will keep driving the staff throughout the year. I need to mention that if any employer decides to adopt this employee compensation plan, it is the responsibility of the employer to empower the staff so that he can deliver his target. Also, an employer should endeavour to keep his promise. You should not be the kind that shifts goal post after the ball is already rolling. This type of attitude can frustrate a staff.
Profit sharing
This can be part of your employee compensation plan. You are simply telling your employees that, as the business succeeds, they will benefit from the prosperity. This means that if the company records profits at the end of the year, you will be willing to share part of the profits among the staff members. This is a form of ‘thank you’ to employees that worked relentlessly to make the year a success. For this system to work, you must have a good accounting system in place. Also, you should not pad the business expenses with your own personal expenses. There should be probity and accountability. You should be ready to maintain an open policy. If the staff can see a good degree of transparency, they will be willing to work with you.
Stock Options
Giving a stock option to key staff is a good employee compensation plan that can help you retain top and talented staff. Some people called this “golden handcuff”. If they see that there is a good future for your business, some discerning good talents will like to stay with you if given stock options. This means that you are making them parts of your business. If they decide to take up the stocks, they become part of the shareholders. They will be entitled to the share of the profit of the company in addition to what they receive as employees. However, this employee compensation plan should be implemented with caution so that the shares of your business will not be grossly diluted.
Read Also: Implications of Hiring a Staff in Small Business
Special Incentives
Apart from financial rewards, other ways to compensate your employees involve giving them fringe benefits such as free medical care, training, paid vacation, club membership etc.
These are different employee compensation plans you can employ to reward your staff. If your employees are well rewarded, they will be willing to work with you. You will enjoy their loyalty and the business will prosper. You should bear in mind that your employees are your greatest assets. Therefore, you should endeavour to treat them well.