Crucial Employee Pay Reminders for the New Year
Boy, are we all glad to see 2020 go! Which is not to say all the sturm und drang last year wrought is now safely behind us. Far from it. Although the calendar has flipped a page, we’re still in the midst of the worst global health crisis since 1918, the American economy is still running on fumes, our politics remain more volatile than they’ve been since the Civil War, and many companies are clinging to life with the desperation of Kate Winslet at the end of James Cameron’s Titanic.
But there is, indeed, light at the end of the proverbial tunnel. Many leading economists believe that in spite of everything, the economy is poised to enjoy a swift, strong, and sustained recovery. When this happens, companies of all types will face a classic question: How much should I pay my employees, and how should I pay them? Answering this basic but critical question requires not only considered thought, but also detailed, accurate, information on norms currently practiced in your local economy industry, data that can be difficult to obtain.
Accordingly, here are six issues to consider as you plan your employee compensation packages for the new year:
What is “standard pay” for every role in your organization? We are talking about average remuneration for everyone from your top C-Suite leaders to middle managers to front-line workers and administrative assistants. Note that such detailed salary information can be difficult to obtain. You can’t just go on the Internet and Google “Average annual salary for corporate accountants in Irvine, California.” (Well, actually, you can conduct such a web search, but the responses you get will likely be very broad, inaccurate, or incomplete.) This kind of focused salary data needs to be purchased. And it needs to be purchased from sources that are current and credible.
Being cheap can cost you. As we slowly pull ourselves out of our current economic morass, there is the temptation to low-ball employees and job candidates. After all, people should be happy to just have a job at all, right? Not quite. Many industries, especially those in the information and financial sectors, have weathered the COVID crisis just fine, and competition for top talent, especially for people with in-demand skill sets, remains extremely high. Thinking you can get away with under-market salaries can cause employees and prospects to flee for more lucrative opportunities, costing you dearly in the long-term.
Paying too much can hurt you, too. Conversely, being over-generous with your remuneration packages can be detrimental as well. Employees who are overpaid — at least by local standards — often develop an “entitlement mentality” that can be difficult to unwind. Such individuals often find it easier to just “coast” than apply the energy, imagination, and sacrifice it takes to constantly innovate and improve.
Performance-based bonuses can be excellent incentives. If you do find that you’re overpaying some (or all) employees, please don’t consider cutting wages. Such a putative step can be demoralizing and trigger a mass exodus of valuable talent. Instead, set up a performance-based bonus system incentivizing performance excellence and, if needed, freeze base pay until market rates catch up with what you are paying your overpaid employees.
Performance bonuses must be aligned with company objectives. Discretionary/arbitrary bonuses and incentive plans are typically not effective because they don’t signal to employees why they earned them or what they need to do to obtain another one. Structured bonus and incentive plans aligned with overall company goals and objectives are more effective for both employees and the organization as a whole. As a reminder, in California, variable pay plans for employees need to be documented in writing.
Attract and keep “hot skill” workers with targeted incentives. Specific types of bonuses, such as retention and sign-on perks (see my article from December 2020), are an effective way to attract and keep workers with high-demand skills. Remunerating such individuals with bonuses rather than higher base pay protects you in the event the supply of such skills becomes over-saturated or demand wanes.
As you can see, setting up effective employee compensation plans is a minefield filled with hidden traps and dangers. Which is why you need the help of a compensation expert. A corporate compensation specialist for more than 20 years, I stand ready to navigate you safely and successfully through this financial labyrinth. If you would like to learn more about what I offer and my thoughts on compensation, please read about me in Forbes.
And if you’re ready to take the next step for your company in 2021, email me at laura@conoverconsulting.com, and let’s talk!