Crash Course: Developing a Total Compensation Plan (Part 1)

On average, between 55-75% of a company’s expenses can be directly attributed to the compensation of its employees.  Building a successful compensation plan that supports your employees and your bottom line is important, and yet, far too many organizations don’t take the time to develop one that properly works for them.  This is the first in a series of posts intended to guide an organization on the ins and outs of developing a total compensation plan.  Though primarily targeted to new organizations, startups or expansion stage companies, it will hopefully teach some old dogs new tricks. (or, at least, refresh some best practices)

You’ve launched.  You have a killer business model and you’re lining up clients.  You’re ready to begin adding what will become your company’s most valuable asset – its people.   As your company begins to build and grow, you’ll soon realize that in order to attract and retain top talent, you’ll need to compensate them appropriately too.  While this is certainly true, it doesn’t go far enough.

Many companies make the mistake of simply throwing a ton of money at a potentially great recruit, assuming that getting the best talent that money can buy is the best investment they can make.  Not necessarily true.  Building a compensation plan is about creating a program that is market competitive but one that also takes into account the value and impact of each employee to your business.  Why are accountants in an accounting firm paid so much, but a software developer in a computer software firm paid more than those in accounting?  It’s all relative.

Overwhelmed yet?  Building a compensation plan that works can be overwhelming and stressful.  You’ll soon begin asking yourself too many questions, none of which you have an easy answer to…

What will you pay them? Will you offer benefits? Will it be competitive?  Will it be fair? 

The majority of companies with fewer than 50 employees don’t have a compensation team, much less an HR department to help them answer these questions.   Who will be managing this process, then?  In reality, regardless of the situation, your leadership team should be in charge of building your compensation plan.  This includes input from the CEO, the board, and definitely the CFO.   Now, I would be discrediting the HR profession if I didn’t say that of course the HR team should have a prominent seat at the table.  However, for those who don’t have an HR team in place, do not use this as an excuse for ignoring the need for truly analyzing and building your compensation plan.  Remember, it will impact your bottom line!

At this point, your conversation should focus simply on your overall business strategy.  Ask yourself:  What business are we in? What is our business strategy? Are we an innovator?  A cost-cutter? Or are we customer-focused? Your compensation strategy should mirror your business strategy.   For example, if your organization focuses on delivering new products to the market while responding quickly to market trends, you’re an innovator.  Your organization will likely have an influx of talent that is highly agile, creative, and risk-taking.  As a result, your compensation plan will emphasize rewards for product innovation, creativity and process improvement.  You’ll need to build your program on the market, and you’ll need to be competitive within this market in order to attract and retain the best talent there is.  Unlike organizations that have specific job structures and descriptions, yours will need to be a bit more flexible, recognizing that your employees, although in similar roles, will have a variety of technical and creative skills and a range of experience.

Make no mistake — a total compensation plan can take months or years to fully develop and implement, and it will still require your constant attention in order to remain competitive, fair and aligned.   Take it one step at a time.  Get the right people involved in the conversation (your leadership team), and don’t assume that by simply throwing a money at a potentially great employee you’re making the best business decision until you’ve done your research.

My next post will cover the best ways you can begin to analyze jobs (not people) in your organization and start to help you put some perspective on building a compensation plan that is not only market competitive but aligned internally as well.

Source:  Mikovich, Newman, Gerhart.  Compensation, 10/e.  New York: McGraw-Hill, 2011.