The Compensation Equation
October 10, 2011 Compensation is a necessary element of every business, and it can be an emotional topic for any employee. While the employee is concerned about getting the right amount of return for their efforts and their quality of life, the managers of the business are focused on how they can best budget and allocate their available resources. Regardless if you are a manager or an employee, the compensation model MUST be done correctly, meet your expectations, and have little question of how it will operate. If the model is built incorrectly, or if one of the parties doesn’t fully understand it, there can be problems. BIG problems.
We work with agronomy clients nationwide. As a result, we have worked with many different approaches to compensating employees. Compensation is a challenging element for any business. The ability to balance profitability and maintain your attractiveness to potential employees is a critical component to any agronomy operation. Therefore, it’s no surprise that compensation is one of the most common topics our recruiting consultants get asked about. Questions like, “What is a competitive compensation range for this role?” and “How should we structure the compensation and commission for this position?” are key considerations for your hiring and long-term retention process.
A Deep Topic
The topic of compensation and the strategies that go into it can make for an entire series of books. However, we can summarize a good approach to compensation by taking a fairly common sense approach, with particular attention paid to three major steps.
The first, and perhaps most important, step is the base compensation. The primary guidance we give our clients in regards to base compensation is to pay competitively. If you want top talent in your area, find out what your competition is paying in similar roles and put your range at, or a bit above the nearest competitor for a like position. While this alone doesn’t guarantee people will come running to you, it at least “keeps you in the hunt.” Once you’ve determined the best range for the position, you still need to consider what employees in this role might consider for the “next step.” As an example, retail agronomy sales people often see the next step as a territory sales manager role with a seed, crop protection, or fertilizer organization. With this in mind, you should seriously consider what these organizations could be offering your employee for these roles. Will your base compensation strategy keep you competitive with these roles in a few years? Does your plan lay out a progression of compensation and/or responsibility to keep you competitive with that “next-step” role? The closer your compensation package is to the compensation of those “next step” roles, theoretically, the less sales-people you should lose to those “next step” companies.
Incentive Plans
The second compensation component we discuss with clients is incentives. There are many approaches to building an effective incentive compensation structure. When discussing retail agronomy roles, we use a rule of thumb that starts with a goal of total compensation being split roughly two-thirds base compensation and one-third incentive for your mid-point sales people. For your top-end employees, they should make enough in incentive to be at a 50/50 ratio of base to incentive compensation. This split works for about all roles from applicator through sales and up to president of the company.
Regardless of your goal, your incentive plan needs to include four key components: Who, what, how and where. Once you have your plan outlined, just ask yourself the following four questions:
- Will this plan motivate the right people? Have you defined WHO you are targeting with this plan and which employees can participate?
- Will this plan accomplish WHAT I want completed? Are the goals and performance objectives clearly laid out? This could be things like increased sales, move specific products, improve operational performance, improve safety, etc.
- Will this plan incentivize them to do things HOW I want them done? Does this plan motivate people to accomplish these goals in the manner I want them done? Or is it sell any product and get the sales at any cost?
- Does this plan outline WHERE the employee can earn their incentive? Make sure there is no gray area in your plan. Is there a specific boundary or timeline? Is it tied to a specific facility? If yes, then properly document these items in your plan to prevent confusion and disgruntled employees later on.
The key is to tie incentive compensation to measurable goals and the measurable activities must be clear and simple. Properly designed incentives are a win-win for the employer and the employee. The employer gains additional sales or profitability, while the employee is driven to do the desired activity and earn additional income. Unfortunately, one practice we see all too often is the strategy of “capping” the incentive plan. This is NOT a win-win. While placing a “cap” or maximum potential on a bonus plan may seem like a wise business decision, it most often results in a very negative effect — capping the sales effort. Placing a cap on a salesperson is one of the quickest ways to reduce sales activity (once goals are met) and cause that employee to say “well, I’ve hit my goal, so there is no need to work I have been until the next sales cycle starts.” In fact, they will likely use that spare time to seek employment with an organization that enables them to earn an unlimited amount of income. Avoid incentive caps if at all possible. Odds are your competitors don’t have a cap, and retaining your top sales people may depend on it.
Benefits And Retirement
Our third compensation component is the portion that many organizations don’t leverage enough — benefits and retirement contributions. While the candidate or employee is focused on the base compensation and annual bonus/commission check, they often fail to realize that another 35% of their compensation comes in health insurance, vision, dental, company vehicle, 401K, disability and many other benefits. Some of our clients are moving to an offer letter that lays out the entire compensation package in great detail. Much like the sticker you see on a new car window, a detailed offer will help the perspective employee see all of additional items your organization can provide them. This step-by-step review of the actual compensation plan will help that future employee better understand that annual compensation is much more than what they see in their regular paycheck. This clarity and openness allows the company to showcase how much it is really paying the employee, above and beyond just base and bonus. Additionally, as another way to battle the “next-step” employers, many organizations provide an annual compensation report to all of their full-time employees. Often presented as part of an annual review process, this report clearly shows every benefit, bonus, tax, paid vacation day, etc., the company provided the employee throughout the year. This review can be a key component to retaining your employees. It’s not uncommon for a $50,000 employee to be shocked to see that they are actually a $75,000 employee.
Compensation strategies are different for every organization based on their available resources and business goals. However, one thing is true for any organization: Your compensation plan must be clear and understandable to every employee, and you cannot change the game (reduce expectations) once the cycle has started. Everyone needs to understand what they are working for, and how they are going to get there. If you incentivize them, then compensate them at the level promised. Incentives can provide some powerful momentum.
Compensation is an investment. Take the time to plan it out well, and you will be happy with the results.
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