Paying Your People

One of the more difficult business concepts for most people to understand is compensation. How much do you pay your people, and why? How often do you increase - or decrease - their comp (and why)? Do you offer an annual bonus? If so, is it a gift or an incentive (and why, always why)?

Let's start with the basics. Every pay plan, regardless of employee or department, must do the following:
  • Reward production 
  • Punish lack of production 
  • Cause the extinction of undesirable behavior

People tend to do the things that reward them, avoid whatever punishes them, and stop doing what does neither.

Your job is to figure out what each employee's goals must be in order to reach your organization's goals. Sales is easy, but your accountants must have goals, too, and your IT folks. This requires that you understand each employee's role well enough to know what those goals must be. If they hit each goal, they receive the corresponding pay (everything is a transaction, remember?). If they don't, there must be a clearly defined (and clearly communicated in advance) penalty (your company is punished in a very real way when employees miss goals; to drive success, employees must feel the pain, too). If they surpass a goal, there should be a corresponding - and well-defined - reward.

Any behavior that is neither rewarded nor punished tends to go away on its own, with the exception of sexual harassment, bullying, prejudice, etc., where the behavior itself is the reward. Your other employees have enough to do without worrying about losers who engage in any of this crap. Fire them on the spot, and throw rotten tomatoes at them all the way out the door. Remember to follow through so that you get a nice, solid impact.

As I've mentioned before, performance is not a once-a-year report. You (and your managers) must meet with direct reports at least monthly to assess progress, obstacles, and provide requested resources and support. Performance review is an ongoing responsibility for both you and the employee. If they're doing better than planned, they have a right to expect recognition and a reward. If they are experiencing difficulty, they have a right to expect you to pay attention and mentor them (but not do it for them). In both cases, your attention is required.

The simpler your pay plan - including your pay plan for salespeople - the better. If an employee has to use a calculator or some kind of an outline to figure out how much money they're going to make, you didn't do your job. A 10-year-old should be able to figure out any given employee's paycheck in their head. You want employees to spend their time working, not worrying about how much they're going to make (or when they're going to get it). Because it is usually the most important thing on any given employee's mind, it must always be:
  • Transparent 
  • Accurate 
  • On time 
  • Simple

This includes reimbursements for business expenses. And when I say on time, I am a big fan of paying salespeople their commission no less often than once a month. I do it weekly, if I can. I've found that salespeople perform better when they have immediate feedback, whether reward for effort or punishment for lack of effort.

I'm also a firm believer in transparency. That means I have no problem with everyone knowing how much everyone else makes. This topic always starts an argument, but here's my reasoning:

If you are running your organization correctly, everyone knows exactly what milestones must be hit to make a given amount of money, right? Likewise to advance. If your employees know that the criteria is objective, and you're not going to promote someone just because you happen to go to the bar with them from time to time, they will work harder to reach the next level. And anyone who doesn't want anyone to know how much they make is hiding something.

My mom always said that, if you have to sneak, it must be wrong. I agree.

As a side note regarding promotions, it is vital that you be objective. If someone hits all of the necessary goals and does not advance, even though a position is open, they will leave. And you know where they'll go? To your competitor, who runs a business instead of a social club.

Also, never advance someone as an excuse to give them more money. Organizations that do this invariably become top-heavy. This makes your organization less profitable, slower to react to the market, and makes communication and the chain of command a complete mess. Always have as few managers (and employees in general) as you possibly can. Lean is healthy!

Last idea for today: Yes, of course you should know what other employers in your area pay their people for the same job. Don't bother with national tables; they tilt toward both coasts, neither of which may be realistic for your region. While you want your pay for a given job to fall about in the middle of the pack (too low, people leave; too high, people get lazy), there are other factors to consider besides pay. Employees leave managers much more often than they leave jobs. If you provide supportive, growth-oriented management, the right people will work to stay, even if a competitor pays slightly more.

People value being valued.

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