How to Find the Right Balance in Your Employee Compensation Programs

Anytime the topic of compensation is raised, folks scatter to establish their positions on the proverbial compensation battlefield.  Finding the proper balance between wage and non-wage compensation has been topic for a number of years at my current firm, as we try to control costs in a market where pricing is very competitive and a geographical location that has bloated salaries due to the buoyancy of the Federal Government.

I must first claim “safe harbor” by saying that I am not an expert on the topic but have a considerable amount of experience attempting to formulate, implement and defend the programs we offer today and in the past.

When the question of “How do if create the right balance in my compensation programs?” is asked, here’s what I have learned from not only my current role but previous leadership roles in organizations.

First the basics…These are the questions we need to answer and understand.

How do we compensate our employees?

Compensation includes these fundamental elements (we can debate all of the categories, but these are the fundamental areas that most organizations have to work with)
a. Salary or Hourly Wages
b. Bonus/Incentive/Commission
c. Fringe- housing (employer-provided or employer-paid), group insurance (health, dental, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), social security, profit sharing, funding of education, and other specialized benefits.

How do our employees perceive how we offer compensation?

The blend of Compensation needs differ by individual and the balance of preferences is usually determined by a number of factors including:
– Age
– Marital or family status
– Level of total compensation

However, we have learned that the strongest factor in an employee’s response to compensation offers is this concept: Living wage.

– Salary or Wages have always been considered the “living wage”. Said another way, “if I get nothing else, how much money will I have each month or pay period?”

– Cash. The only part of my compensation I can use to pay the bills, buy groceries, and gas.

Thus, until the Salary or Hourly Wages for an individual create a living wage that meets their requirements for basic living, at whatever level it may be, wages will always be the number one factor. Individuals will gladly forego all other compensation elements until that need is met.

Yes, it is a pretty obvious concept but one that is often overlooked when compensation policy is created, especially when the policies are created by individuals whose “living wage” far exceeds their basic needs.

So how do we address this challenge? How do we convince employees that this really great balance of Wages and Benefits are good for them?

The answer normally is, “it’s very difficult”.  This is especially true if there is a mismatch between the overall total compensation model and the full gamut of employees’ needs. A great retirement plan or great time-off plan may mean nothing to an employee focusing on the present.

There a many possible approaches to solve this problem.

Here are a couple of ideas….

So you say, “Well, I get it, but our non-wage benefits are great and cost us a lot of money. We can’t simply raise wages and still remain profitable or competitive in our marketplace.” Yes this is true.  But creating programs that do not attract or retain employees won’t work either.

Perhaps, a solution is to look at the non-wage benefits and determine which of those can be variable or elective. Can the employer “buy-back” paid time-off in exchange for higher wages? Can you offer different health benefit choices that allow the employee to opt for less coverage and a higher deductible or optional services that will reduce their total cost of employment, so that you can put the saving back into wages? Look at all of your non-wage benefits and determine if there are opportunities to rebalance your wage to non-wage costs.

Another option is to add a variable component to the wage or salary based on performance incentives or profit sharing. This normally works best when the discrepancy between the current wages and the required living wages is small. It works best when a bonus is an incentive beyond the requirement to meet the living wage threshold. This concept works well for the employer on a number of fronts but with respect to balancing wage and non-wage compensation, it eliminates the risk associated with inflated costs that are now balanced by incremental revenue and profitability. This program takes foresight and careful management but can offer a longer-term solution that does not require the employee to choose or sacrifice one for the other.

These are just a couple ideas to help develop that balance.  Clearly in any process, understanding the demographics and needs of your employee base is the first step, in choosing the path that is right for you. The next could be surveying samples for the various employee demographics and carefully extracting the information that can lead to understanding that proper balance, based on needs but not necessarily wishes.

There are a lot of publications on this and related topics out there, one of the most recent that caught my attention was re-published by the Motley Fool. http://www.fool.com/investing/general/2014/02/01/american-factory-workers-getting-33029-yearly-bonu.aspx?source=iaasitlnk0000003

I welcome you thoughts and feedback on these approaches.

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About Tod Kerr

Tod is a senior corporate leader with 20 years of experience managing business operations in numerous functional areas, with a focus on developing and marketing business to business technology solutions to world-wide high tech markets that allow customers to operate their business more efficiently by driving out costs, improving productivity, and creating value for their clients.
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