The Right Compensation Model4:00 PM EST Fri. Jan. 18, 2013
Business author Verne Harnish asks this question of entrepreneurs trying to grow their young companies: Would you rather have a bunch of low-paid dumb people working for you or a lot fewer, better paid smart people? Finding talented people and delegating key responsibilities to them is one of the most important things an entrepreneur can do to help a small company grow. And compensation is a critical element of that strategy. Here are five rules from Harnish that top executives should follow in developing a compensation model.
The argument here is that by paying fewer, more talented people a company can boost productivity more effectively than a company that hires more people at lower wages. Harnish cites such examples as financial services company Goldman Sachs and retailer The Container Store, which report higher productivity by paying higher wages to attract higher-caliber workers. This strategy also helps resolve one of the biggest challenges many small companies face: attracting and retaining highly talented employees.
There's no one compensation plan that works for every company. Harnish said the key is matching the structure of the compensation plan with a company's culture. Some companies, for example, might emphasize commissions and bonuses over salary to encourage individual employee efforts (such as a sales representative) and even to spur competition between employees. But if teamwork is the goal, straight wages is a better approach. And look beyond wages when thinking about compensation plans. Rather than a bigger paycheck, some talented people may value additional time off, sabbaticals or other non-wage compensation.
Citing research done by author Jim Collins for his book "Good To Great," Harnish said many companies are constantly changing their compensation plans as they try to grow. That can cause confusion and even resentment among employees, hurting productivity along the way. That's not to say an executive shouldn't ever tweak a company's compensation strategy. But Collins found that great companies tend to establish a compensation system and then leave it alone.
Keeping a company's most critical employees is paramount. And that can mean breaking the rules when setting their compensation, Harnish said. If a five-star sales vice president wants an incentive-based compensation plan instead of salary, even if that's not a growing company's usual route, then that's what he or she should get.
"Bonus" plans often become part of the expected compensation system and stop becoming true incentives for employees, according to Harnish. Entitlements do not drive a company's performance. Instead, the focus should be on offering bonuses and "mini-games" (short-term incentives like prizes or company-paid trips) designed to meet specific goals.