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October 14, 2002 Issue

Innovative Compensation Strategies from Small Organizations

As the American economy continues its ups and downs, many large organizations should look to small organizations to determine how best to plan 2003 compensation programs. Keep in mind that over eighty percent of Americans are employed in organizations with less than five hundred employees. The compensation ideas we will explore have a direct influence on a large sector of the employed population.

The first small organization innovation is determining the appropriate level of variable pay awards, a task that has challenged compensation professionals for many years. Incentive payments can sometimes be so large they become the priority of the employee’s day-to-day existence. This overwhelms the program’s intent because there is too much money at stake. However, incentive payments also can be too small, making them meaningless. Small organizations experiment to discover the “just right” level of incentive payout.

Recent research by Inc. magazine reports that annual incentive payouts of $1,200 to $2,400, equivalent to $100 to $200 on a monthly basis, are the “just-right” level. Over eighty percent of approximately six hundred organizations report this incentive level is just enough to get employees’ attention but not so much that the employee becomes dependent upon the incentive for their livelihood.

Another innovation from small organizations is how to address individual versus team components of compensation programs. Many of these organizations cannot compete in the market for talent against their large competitors. In light of this, these organizations spent time better understanding the needs of potential applicants in terms of the total rewards package desired.

Because of their size and flexibility, smaller organizations take a menu approach to determining the total rewards package of potential employees. One of the more popular innovations is the option of direct compensation in lieu of non-mandatory benefits. Employees often request the option to have increased base pay instead of using the organization’s benefit package. These organizations utilize a philosophy of non-paternalism if the employee chooses not to be taken care of.

While on the surface this may appear to result in pay inequities, the small organization invests further time and effort in communicating all aspects of the total rewards program to employees, while expanding traditional benefit statement information to include all employee related organization costs. They break down all direct (e.g., pay, benefits, pension, FICA, etc.) and all indirect (e.g., training, meetings, events, etc.) organization costs to ensure complete employee understanding. They also take the time to communicate the relationship and impact of these costs on the organization’s operational bottom line.

Another small organization innovation is taking the concepts of mission, values, and philosophy to heart. As written in Inc. magazine, the more successful small organization has the following elements in its mission statement:

Maximize revenues
Provide value added services to customers
Provide quality customer service
Have fun

Their values often include the following:

Encouraging creativity
Admitting to and learning from mistakes
Enhancing a sense of community
Striving towards continuous personal and professional improvement

These organizations know their success is dependent upon their employees’ ability to understand their role in meeting customer expectations and to help each other get there. One CEO of a three hundred employee manufacturing company states

“We are really in the people business, not the business of making automotive parts. We have to understand, as a supplier, what our core customers are expecting. Each employee may be put in a situation of talking with representatives of our core customers. They must know how to listen and understand their expectations. Our employees must also know how to take this information and, as a team, formulate appropriate responses. To that end, we encourage personal listening skills and reward team efforts based on specific customer results.”

These organizations see the link between employee and customer loyalties. As a CEO of a small specialty retail organization puts it:

“Employees who are not loyal are unlikely to keep loyal customers. In our business, an increase of five percent in customer retention can impact the profit margin by twenty-five percent. Thus our human resource strategy is to build employee loyalty first.”

Building employee loyalty first is accomplished through a combination of individual cash-based incentives and a team-based profit sharing program. This organization found their employees most interested in advancing their educations. In lieu of the cash incentive, employees may opt to have their advanced education paid for in the form of an equivalent incentive scholarship program.

Reinforcing management in their interactions with employees is another small organization innovation to explore. The successful small organization knows that how they positively and negatively reinforce their managers has a critical impact on the employee loyalty equation. Many of these organizations utilize separate incentive opportunities for management based on employee satisfaction, turnover, and customer service as they relate to their employees. These organizations put their managers on notice that they have a personal responsibility for the development and performance of their employees. They are also held accountable for the development of effective teams, both within their unit and among units they work with on a regular basis.

A final note on innovations to consider. The search engine Google has grown to over two hundred employees. As they have grown, they focused their total rewards strategy on providing many “lifestyle” based programs. They have taken the approach that base pay will be set within ten percent of the market, but have added the following to their laundry list of lifestyle benefits:

Free daily lunch provided
Fifteen days of vacation when hired
Corporate membership at a local day care with employee discounts
On-site flu shots
Private stock equity with four year vesting and future stock grants based on individual performance
$2,000 employee referral bonus program

Google receives approximately two hundred resumes a day and is experiencing five percent turnover. They find this mix of lifestyle benefits, along with a somewhat competitive base pay program and private stock equity, works well for them.

While not all of these ideas will work for your organization, there is much we can learn from smaller organizations’ compensation programs.

How we value our employees in terms of their importance to the organization’s success can drive many of these innovative programs.
Organizations need to understand the needs of their employees in terms of lifestyle benefits that can be offered.
Creatively and flexibly are how these organizations operate.

With eighty percent of the population employed in smaller organizations, we are forced to consider this human relations style as the economy gets stronger and we begin competing for limited employee resources.

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ISSN Number 1549-0467