Did you ever think that instead of giving a person an annual raise, it would be much better to empower them to give themselves a raise with a “win-win” comp plan? In today’s low-inflation world annual raises amount to just 2% to 3%, on average. That is not very much, but it takes the initiative away which is not the best way to motivate people.
A better way to stimulate people to produce is with a larger reward tied to the financial results that they produce. This is easy to do for people such as sales reps, managers, recruiters and the like, where their production is usually measurable. Even for staff positions such as accountants and human resources personnel, with a little effort much of their contribution is measurable as well. The key is finding out the financial impact one generates and tying a commensurate reward to that result. Those results can be paid out on a sliding scale so that the better the person does the greater the rewards are, as their contribution to the profit and value of the company increase even more.
Let’s work up an example for a sales rep. Their base salary is $50,000/year and they are currently generating $100,000/year in margin. Their current earnings are $60,000/year. If we gave them a 2% raise and they doubled their margin they would earn $71,000, or $11,000 more, while their contribution of margin less compensation (before burden) would have gone from $40,000 currently to $39,000 with a raise but no increase in margin and $129,000 with a raise and twice their margin.
On the other hand, if you created a sliding scale instead of a raise you might get a win-win combination without the risk of a giving a raise. If we apply a 9% commission for margin up to $50,000, then an 11% commission on the next $50,000, 13% on the next $50,000 and 15% on the next $50,000, and cap the rate at 16% on everything over $200,000 — this would provide a substantially greater incentive to produce, enriching both the company and the rep. In this situation, at current production the rep earns the same $60,000 and if he does not improve the next year the company does not pay out more. If, however, he doubles his margin, he earns $84,000 and the company nets $126,000.
In both cases the increase in contribution is about 3.2 to 1. The company does pays out a bit more in the sliding scale example, but under this program the company is more likely to both motivate and retain the rep. It is a win-win for both parties and the slightly greater payout is an insurance policy to achieve higher production.