Let’s talk compensation. It has been well documented that the amount of someone’s paycheck is not the #1 driver for their professional satisfaction. However, it does get pulled up to the top of the list quickly in the absence of the top drivers such as recognition, sense of purpose, ability to contribute, opportunity for advancement, etc. Today, I am discussing compensation plan designs. In my opinion, there are a few KEY considerations to incorporate into designing compensation plans to make them great.
• The individual plan must be aligned with the company objectives.
• The plan needs to reflect the productivity and output of the individual.
I have seen countless of compensation plans that do not support the two key principals above. In my consulting work, I see an abundance of comp plans that are not aligned with a company’s objectives, and even more concerning, are in direct conflict with the company’s goals. The employee may “win,” but the company suffers or vice versa. For example, a salesperson's compensation may promote selling a lot of jobs regardless of the gross margin associated with those jobs. The most common mistakes I see regarding compensation design:
• Pay rates/plans based on tenure
• Pay rates/plans that have no connection to the output of the person
• Pay rates/plans which rewards behaviors that are not aligned with the team
When compensation plans are not aligned with company objectives, the result most likely will have employees directly working against the organization (or other departments within the company). Two clashing parties generate conflict, and conflict causes disruption in the form of turnover, resentment, selfishness, unproductive behaviors and often unintended silos.
How much is a high-performing person worth to the organization? A lot. Sometimes double their coworkers performing the same role. Sorry if I offend people with this statement or philosophy — all people within a role should not be compensated the same if their output is different. Their compensation should be a direct reflection of their production. “Pay by Production” is a logical solution that makes sense. If a Pay by Production strategy is also aligned with the company’s objectives, there are numerous parallel benefits. Perhaps the biggest advantage is transferring the ownership and control to the individual to determine their own pay. They can theoretically give themselves a raise by becoming more efficient and productive in their role. Most managers do not get excited to address the concerns a person may have with their individual compensation or the desire for a “pay raise” conversation. When correctly deployed, the Pay by Production method eliminates these conversations all together.
The other aspect I love about the Pay by Production strategy is the ability to generate teamwork and unity inside the organization across departmental lines. The more cohesiveness each role has with one another, the more harmony inside the walls of the organization. I especially love the Pay by Performance strategy that can tie multiple roles together.
Looking back at the specific design components for an individual plan, I like starting with the desired result we are seeking for the role. For example, for a templater or CAD department role, the #1 deliverable I stressed was perfection — it had to be right. So, we designed the plan to pay well for right. The benefits of a Pay by Production comp plan can quickly get overshadowed by unintended consequences that may not have been fully vetted on the front end, and we must be conscientious of the areas that may get exploited. A perfectly logical #1 deliverable for a salesperson could be hitting sales goals. However, if there are no guard rails around that goal, there may very well be some unintended casualties that take different forms. If a salesperson has no specific margin requirements, they will likely increase close ratios and sell more jobs at the expense of profit. They can (will) also likely spend less time educating customers and setting the “right” job expectations, which can compromise the operations team when those customer expectations are different from reality.
The design of the Pay by Production compensation model takes work and energy. They need to be vetted and thought out on the front end. They also require a lot of oversight and tracking. However, the right plan, which is aligned with the company objectives, will promote a great culture and liberate the individual. It is a lot of work to monitor and maintain a Pay by Production comp plan, then again navigating the recruiting efforts to backfill positions vacated by unhappy and disgruntled people is a lot more work.