Win-Win Compensation Plans

E000249It would be desirable if owners and staff worked toward common objectives. An owner’s goal is to achieve growth, maximize profit and increase the value of their company. Employees want to maximize their compensation, have opportunities to advance, good working conditions and job security.  How does one reconcile these two objectives?

Comp plans were seen as a zero sum game with the winner winning and retaining most of the money paid out in wages. During periods of high economic growth and labor shortages the employees have the edge. More recently, due to outsourcing, automation and the recessionary periods, employers were in the driver’s seat. With few exceptions, the union labor movement is long dead, pitting employees against their employers. Progressive companies realize that employees can be their most valuable asset when made part of a team and properly incentivized.

Interestingly, China’s labor cost advantage is rapidly eroding due to an 17 percent increase in wages, substantially lower productivity compared with American workers, the theft of intellectual property, etc. U.S. companies have gotten their costs under control with better management tools and operating with a leaner and better educated workforce. It is estimated that by 2015 U.S. production costs for many items will be on par with China. On top of that we are in the new normal economy for the indefinite future where the old rules of an eight- to 10-year boom-bust economic cycle may no longer apply. There should be a slow but hopefully sustainable growth assuming no “black swan” events. If U.S. companies are properly managed both they and their staff should come out ahead. So the question is how does one go about doing this?

We will concentrate on staff compensation, although perks, contest, etc. should not be ignored. There are two parts to a good comp plan; short-term comp and long-term comp. Short-term comp (annual) has a base salary (or a draw) plus an incentive in the form of a commission. The commission for producers (sales reps/business developers and recruiters/schedulers) should be tied to the margin dollars they are responsible for generating. This should be calculated on a sliding scale where the highest producers that one can least afford to lose are commissioned at the highest rate and those less critical at a lower rate. This sliding scale is the core of a win-win comp plan. The amount to be paid out should ideally be part of a pool of monies set aside for staff compensation so that both the company and its key producers do well. We usually divide up the pie into four portions (which need not be equal) for the person: who develops the relationship with the client, who finds and qualifies the candidate, who gets job order and detailed specs, and who schedules, debriefs the candidates and closes the deal. The amount paid out as a percent of margin $ varies as overhead (fixed cost) varies, but there are certain rules of thumb depending on one’s mix of business. The details of the payout plan should arrive at a decent return on sales for the company and high compensation for superior employees. We test the plan under various scenarios to make sure that it works as intended for a win-win program.

The second part of the strategy is a long-term retention plan to retain the best people which can include cash, real or quasi stock (golden handcuffs plan). This is conditional on achieving certain performance standards and can be used as a retention and exit plan. The idea is to lock in those people needed for long term growth so they will not sacrifice a lucrative deal to take a job with the competition. As the company value is a multiple of its profits, one can design a generous program which is the ultimate win-win comp plan. There are rules of thumb here too as to what is needed to make this effective along with conditions for qualification.

Michael Neidle
Michael Neidle is president and CEO of Optimal Management, an advisor to staffing firm owners and managers.

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