Manufacturers & Distributors ARTICLE - It’s Tougher Than It Looks

Devising a compensation strategy for your company

Target Audience: Manufacturing Industry Professionals, Managing Partners, Business Owners, Payroll Administrators, Human Resources

Without a good pay and benefits structure, you can’t attract and retain the best employees. But devising a compensation strategy is tougher than it looks — many factors go into paying competitively without breaking the bank. Here are some ways to get it right.

Determine Your Philosophy

First and foremost, you need to find your own compensation philosophy. A good way to start is by considering the compensation practices of your peers. This doesn’t mean you have to copy them. You simply need to decide whether you want to distinguish yourself as an employer by paying higher-than-average salaries or by paying salaries that are merely marketplace competitive and then finding other ways to attract and retain top performers.

Another option is to use compensation to attract employees but other means to retain them. Few small to midsize businesses can afford to draw, motivate and retain through lavish compensation.

But offering signing bonuses could allow you to get the best in the door. Once they’re in, you can help keep them there using less expensive strategies, such as by allowing flexible hours after a set period of service, creating a pleasant working environment, and providing praise and advancement opportunities.

Whatever you choose, try to foster a compensation philosophy that acknowledges your objectives without bringing on a huge financial strain. For example, your rationale might be to pay a base salary that’s a little lower than industry peers offer but provide opportunities for substantial bonuses for strong performance. Or you may wish to offer equity to everyone, so that each employee can share in your company’s success.

Find Salary Comparison Data

When devising equitable compensation, you naturally want to make sure it’s also fair to you and not beyond industry or regional norms. The U.S. Department of Labor and Bureau of Labor Statistics have a wealth of comparable data on their Web sites (www.dol.gov and www.stats.bls.gov, respectively). You might also consult with a professional recruiting firm, some of which offer free or low-cost compensation data.

Granted, job roles within smaller companies make it difficult to directly compare position responsibilities in the market and get reliable salary comparison data. A company’s degree of competitiveness and ability to pay what the market bears can also be challenging.

Yet, to achieve and maintain external equity, you must consider the going market rate. Especially in a business where employees believe they can receive better pay for doing the same job elsewhere, workers have little incentive to remain with an employer — therefore, you must be concerned with external equity.

Pinpoint a Range

From both a marketplace perspective and an internal company viewpoint, it’s important to group together jobs of similar value. Thus, develop competitive salaries around the market rates for those positions. A typical salary range consists of a minimum, a maximum and a midpoint (or, control point).

The minimum is the lowest competitive rate for jobs within that range and normally applies to less experienced staff. The maximum represents the highest competitive rate for jobs in a given range. This is typically a premium rate for “star” employees and industry veterans.

The midpoint represents the competitive market rate for fully performing workers in jobs assigned to that range. Think of it as a guideline for slotting various positions and individuals in appropriate salary ranges.

Back Up Your Decision

Of course, jobs requiring greater skills or more responsibility are seen as more valuable than lower-skilled ones. But employees may misunderstand the salary structure or judge it unfair, subjective or even unlawful. To avoid this problem, make sure yours is:

Thoroughly researched. Analyze the work your employees are now performing, plus the jobs you expect them to carry out in the future as your company grows. Double-check that you’re paying these workers commensurately with their duties and comparatively with their peers.

Market current. Assess the market annually and note its standards. Understand where your company falls and determine whether changes are necessary to achieve your recruiting and retention goals.

Results oriented. Reward achievements and recognize potential. Naturally, employers want to offer incentives that encourage employees to achieve a measurable goal rather than fully paying out bonuses based solely on potential.

Above all, strong compensation plans consider what’s needed for the company to maintain its competitive edge today and sustain growth tomorrow. Combining rewards with recognition helps encourage workers to exceed performance expectations.

Set Your Course

With your salary structure in place, your organization must then set its course for determining the best way for employees to progress through it. There is some controversy, however, about linking pay to performance.

Some observers believe that companies shouldn’t use compensation to motivate employees because workers might stop focusing on quality of work and start focusing on money. Additionally, workers may feel that the merit, or “pay-for-performance,” model pits staff members against each other for the highest raises.

Thus, some businesses give uniform pay adjustments to everyone. In doing so, these companies hope to eliminate competition and ensure that all employees are working toward the same goal. But, if everyone gets the same raise, is there any motivation for employees to continually improve?

Many businesses don’t think so and concede to using money to motivate employees, whether by bonuses, commissions or bigger raises. In its most basic form, a merit increase is the amount of additional compensation added to current base salaries following an employee performance review. Two critical factors typically determine the increase:

1. The amount of money a company sets aside in its “merit” budget for performance-based increases — usually based on competitive market practice, and
2. Employee performance as determined through a performance review process conducted by management.

Although pay-for-performance can achieve its original intent — recognizing employee performance and outstanding contributions to the company’s success — beware that your employees may perceive merit increases as an entitlement or even nothing more than an inflation adjustment.

Formalize Your Approach

Many businesses’ compensation policies have evolved over time — and it shows. They pay their employees haphazardly and risk losing valuable staff members or even incurring lawsuits as a result. By formalizing your approach, you can do right by both the hard workers earning the money and the hard-working company paying it out.

FEELEY & DRISCOLL, P.C., an accounting and business consulting firm, has offices in Boston, Massachusetts and Nashua, New Hampshire. For more than thirty years, Feeley & Driscoll has provided businesses with auditing, accounting, forensic accounting, income tax planning, estate tax planning and management consulting services. Serving a variety of industries, including construction, manufacturing, healthcare, architects and engineers, and professional services, biotechnology, and information technology. Feeley & Driscoll is committed to helping clients grow their businesses profitably.

Find out how our accountants and consultants can add value to your business. Email us or call us at 1 (888) 875-9770.

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