Hypothetical Employee Compensation Scenarios

Know How To Defend and Adjust your Employee Compensation Program

• Twenty-five year old engineer complains that he’s making only $40,000 when a 55 year old colleague makes twice that, “We do exactly the same job why should he get more than me?”

Well, in this organization, employee compensation is based on performance. We never have enough information in order to make decisions on situations like this. But that’s a big question.

How well does this older employee perform relative to the newer guy? We don’t want to pay on seniority or draw there as a high correlation between seniority or years of experience and performance. That may be why the older employee makes more than a younger one, but performance should be the primary criteria for employee compensation.

• Several employees have been talking among themselves and concluded that at this company performance reviews are rigged. They throw in a bunch of negative feedback just to justify low employee compensation increases.

Everybody has areas for improvement. Even your CEO has room for improvement. Just ask the board what things your CEO should be working on and they will come up with a list for it if they haven’t already. Even you – as good as you are, have some things you can improve on. And everybody should get some things that they can improve on. But you have to present those improvement areas in the right way. Remember I mentioned the balancing between positive and negatives? Okay, so I don’t think that really happens in most cases. But everybody does have areas for improvement.

• Several managers complain that it’s impossible to motivate and retain their staff unless they can offer bigger raises, this despite the fact that several salary surveys show that a company is paying employees slightly higher than industry average.

What this doesn’t tell you is what are we paying – what areas of employee compensation are we paying that are slightly higher than industry averages. Are we talking about salaries? Are we talking about total cash?

It could be that total cash is higher than industry average but maybe base salaries are lower. So that’s trade off some companies have to make. We will lower base salaries and put more into variable expense – remember, we talked this, and by building up the incentives that are actually larger than the marketplace. It may be a good strategy but there are limits into how far you can push this.

So the only thing to suggest without more information is just to try to get more information if you can. Let’s see exactly what that survey data looks like and let’s compare it to our people. And maybe we do need to make adjustments. The thing that separates the men from the boys and the women from the girls in the employee compensation area is knowing when to make exceptions and when not to.

• The company president announces a new strategic direction. He or she says, “We want to focus on increasing business with existing clients.” He tells his top team, “It sounds great.” But a few months later he learns that customer service reps are still being incentivized based on the number of calls answered per hour. Consequently, they hurry to get customers off the phone thus, missing out on opportunities to up-sell, exactly opposite of what the new strategy called for.

Remember, on these kinds of incentive programs – in fact, all of employee compensation, what you measure is what you will get over time. Obviously, they haven’t changed the incentive program or the employee compensation program for the customer service reps in order to be in line with the company strategy of increasing business with existing clients.

They obviously are being paid or incentivized based on the number of calls answered per hour which is a lot different than spending more time with existing clients so you can sell more. So, in my opinion, there’s something wrong with the sales plan here. They’re not in sync with the company objectives.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri