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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
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