We recently kicked off a series of articles that are of high interest to the CEO and senior leaders at companies large and small. “How to Recruit, Reward and Retain Top Talent in 2018.”
In this third installment, we’ll share tips from industry experts on you can design and implement competitive compensation programs for your company.
For most companies, replacing an employee who quits costs an average of 21 percent of the employee’s annual salary. And that doesn’t even take into account the thousands of dollars companies invest in employee training and skill development programs.
Andrew Chamberlain, the chief economist at Glassdoor, says “it may be tempting to dismiss turnover as a fact of life in today’s fast-moving job market.” Companies that harbor cavalier attitudes about employees who choose to leave (“Let them go, we’ll find someone else.”) do so without fully understanding the long-term impact of chronic attrition.
“The many reasons employees jump ship are surprisingly simple, and business leaders who don’t ask why workers want to go may be unnecessarily losing people who are pricey to replace,” warns Dr. Chamberlain in the Harvard Business Review.
One of the top reasons your employees leave is because they believe they are underpaid, or even worse, undervalued. Especially in today’s hyper-competitive job market and low-unemployment economy, leaders must be providing employees with competitive salaries and benefits.
Lest you think you can motivate an employee with a fancy new job title, Dr. Chamberlain says forget it. “Competitive pay is essential to retaining talent. We found that 10 percent higher base pay is associated with a 1.5-percentage-point increase in the likelihood that workers will stay at their current company the next time they move to a new role, a statistically significant link.”
Competitive Compensation and Benefit Programs Are Essential
Designing competitive compensation and benefits programs are essential for attracting and retaining top talent. But where so you start? Pam Newman says, “Employee compensation can be a sensitive subject, and people get very passionate when trying to determine the most appropriate compensation plan for any business.”
Ms. Newman shares two essential factors to consider when shaping your company’s compensation plan:
- Incentives and bonus plans — Have clear guidelines to minimize any confusion. They shouldn't be seen as a guaranteed payment, but instead should be measured by the performance of the individual, team or company. If end-of-the-year bonuses are given every year regardless of performance, they no longer serve as a motivating factor; they are expected payments. Incentives and bonus payments should be reserved for employees who go above and beyond their everyday performance to help the company exceed its profitability goals.
- Understand benefit plan costs — Understand benefit costs before you offer them to employees. Adding and removing benefits can be very demoralizing to your staff. So, don't add anything you don't plan to continue long term.
Six Ways to Design a Strong Benefits Compensation Program
Joe Galvin, chief research officer for Vistage, consulted with several compensation experts to help him create his list of “Six Ways to Design a Strong Benefits Compensation Program.”
1. Define your compensation philosophy
Before deciding on a compensation program, your company should define its compensation philosophy and articulate it with a clear, focused statement. Not only will this guide your decisions about hiring or promoting employees, but it will help solve problems that may arise when implementing your program.
2. Link compensation to business strategy
Design your compensation program to reward behaviors that advance your company’s strategic objectives. For example, if a young company wants to ramp up its market share, its compensation program should reward employees who bring in new customers or clients. If a mature company wants to strike a balance between growth and profit, its compensation program should equally reward activities that generate growth or profit.
3. Consider your culture
A compensation program can effectively reinforce your company’s culture and vice versa. It sends a message to your employees about who you are as an organization, what you value, and what skills and results you reward. As a result, it’s vital to ensure that your culture and compensation program work in sync and complement one another.
4. Connect value creation to compensation
To reward behavior that drives results, you need to know what creates value in your company — both from the perspective of your employees and your customers. This value can be measured qualitatively (e.g., you’re solving a problem for your customers) as well as quantitatively (e.g., your goods or services are generating revenue).
5. Market your total compensation package
Most employees think of compensation as base pay. They forget — or never told — that anywhere from 30 to 50 percent of their total compensation comes from other areas, including:
• 401k or profit sharing
• Retirement and pension plans
• Stock or equity
• Incentives and bonuses, and more
6. Measure your return on invested payroll dollars
How do you know whether you’re getting a good return on your invested compensation dollars? Measure it. To do this, first decide what you want to examine — whether it’s productivity, bottom-line results, employee turnover, quality of customer service, or your ability to hire and retain top talent — in the context of your overall business strategy. Afterward, start tracking them and see whether the return on your compensation dollars matches your expectations.
In our final installment of “How to Recruit, Reward and Retain Top Talent in 2018” we’ll look beyond money to what companies can do to retain their best employees by creating great workplace experiences.