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Payment Philosophy: Part One

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It is my belief that compensation plans should be based on a paid-for-performance system, meaning that all new employees working at the same job and tasks should be started at the same rate and then rewarded with raises based on how well they perform their job.  The temptation is to reward raises based on longevity to try and increase retention rates. At first glance, this plan makes sense: if you stay, we pay. This cuts down on training new employees and can make for a better-run operation by keeping senior employees who do not need much supervision. However, automatic annual raises can demotivate employees because they begin to expect them. Thus, there is no sense of urgency to perform well. Simply encouraging employees to stick around for their annual raise may not be the best thing for the business. By rewarding raises for exceptional performance, it is easy to create a competitive atmosphere that keeps employees motivated


One potential issue with pay-for-performance strategy however, is that pay can be more variable across employees. You can have multiple employees who all have been with the organization for the same amount of time all making different amounts of money. Thus if the pay raise process is not fully understood, the compensation plan may seem unfair or unjust to employees. The best way to prevent that, and actually insure that the compensation plan works to motivate employee performance, is to make sure that employees fully understand the process. Have clear-cut goals and expectations, in writing, that must be met in order to be eligible for a raise


Many businesses struggle with where to start their new employees, especially hourly employees. A strong temptation for small business owners is to start at their state’s minimum wage as an hourly rate and reward rises from there. However, I have found businesses that start at minimum wage have higher turnover rates and complain about not being able to attract quality employees. Employers must look at what the position is worth in terms of its potential to help or hinder success and pay accordingly. If employers can create a compensation plan that represents the importance of position, they will be more likely to attract the right person. For example, minimum wage employees, in the service and retail sector, are the primary contact between the organization and the customers. This means that if employees are not representing the company well, the customers will have no other perspective to judge their experiences. Because businesses must rely on a strong and study stream of loyal customers, they must have employees with the skills and work ethic to represent their organization with respect and professionalism. It is too easy to discount the importance of hourly employees, yet the truth of the matter is that hourly employees will make or break the success of almost any business.

Check back on Monday for Part Two. We will be discussing how to use money as a management and motivation tool and how to insure that your compensation package is perceived as fair by your employees.

July 20, 2011 by Executive Editor, Mark Zarr.  All rights reserved 2011

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