The Basic Components of a Compensation System

As a reflection of leadership’s strategy about how it values its employees, a well-established compensation system allows employers to optimize on employee engagement, productivity, financial resources, and organizational goals.

Consider the following components and how to apply them into your business today:

  • Organizational Goals. Make sure to pay employees for their individual performances as well as reward them for efforts which support the business goals of the company, department, and/or team.
  • Employee Communications. Realistically communicate the company’s compensation program. Ensure whatever the message conveys, it is done so in manner that is fair, competitive, appealing and respectable. If the market conveys a particular value and the employer offers below the market value, then employee dissatisfaction and turnover rates will likely increase.
  • Rewards and Recognitions. Ensure that project recognition is differentiated from individual recognition; in doing so, each employee’s value and relevance can be more easily identified.
  • Timely Acknowledgements. Pay attention to the timing of rewards since desired performance should be rewarded as quickly as possible.
  • Simple Measures. Keep performance measures as simple as possible, and limit the number of measures to track.

Taking care of employees with a well-designed and well-communicated compensation program will help in the long-term investment of your employees as the company’s strongest asset.


There will be 3 levels of compensation.

  • Short term compensation – Salary
  • Mid-term compensation – Annual Bonus
  • Long-term compensation – Long Term Executive Compensation


Suggested approach to short term salary compensation  

  • Salary generally is a fixed expense of the company. Every pay period the same money is paid to each employee to cover their work efforts. It is an overhead that cuts into profits, in this case patronage dividends.
  • I would suggest that the salary of the Executive Team be kept stable.
  • Increases in compensation should be made by increasing the dollar value of the points they can earn in bonuses rather than an increase in salary which only increases overhead.
  • Over time you may wish to establish a ratio between the highest paid and the lowest paid within an organization. Clearly if general staff and middle management receive salary increases and executive staff does not, the gap will decrease between the two which may cause friction and problems.
  • Thus, the suggestion is that the salaries of the executive staff remain fixed for a period of at least 3 years. Then an adjustment might be made between salary levels and the dollar value of bonus points.
  • Salaries for staff should be increased only for these 4 reasons
    1. Increase in market demand for that position / job.
    2. Improvement in proven efficiency in tasks; (produce 5 widgets in the same period that you use to produce 4 widgets)
    3. Improvement in proven effectiveness (add a new skill that improves the delivery of services to a customer)
    4. Overall promotion to a new level of responsibility.


Suggested approach to annual bonus pool.


The annual bonus is based on achieving annual budgeted results.

  • Budget established is reasonably conservative, but expected results as agreed to by the Board and the executive team. The shareholders (owners) should reasonably expect these budgeted results to be achieved.
  • The annual bonus awarded will be divided into team bonuses and individual bonuses.
  • Bonus will be paid for achievement of budgeted numbers. The amount of the bonus pool available for distribution could be pro-rated based on relative achievement of goals and budget.


  • Allocation of dollars awarded based on
    • 25% to team bonus
      • The team in this case is the company’s bonus eligible executives. All who are eligible for annual bonus money will be awarded a team bonus based on achievement of the corporate KPIs.
      • If the team achieves its budgeted numbers, the entire team receives the bonus dollars initially established. If the team fails to achieve the budgeted numbers, then no team bonus is awarded. In the case of the award of the team bonus, this is an all or nothing criteria. The team wins together or fails together.
      • Additional team bonus money may be paid for meeting established targets that are stretch and beyond the budgeted numbers.
    • 75% to individual bonus
    • The individual team member has his or her own goals and numbers to achieve. This is based on the PDP (Performance and Development Plan) targets established at the beginning of the year. It is the achievement of the total plan, including KPIs, goals, tasks, behaviors and Personal Growth Plan as established with the PDPs.
    • The amount of bonus awarded is based on the individual’s performance. Thus, it is possible that the team fails to meet their goals but the individual achieves his. The individual will then get their individual bonus but not the team bonus money.


  • 3 levels of annual bonus pool
    1. Executive staff allocation
      • President = 25% of annual salary
        • Team bonus = 6.25%
        • Individual bonus = 18.75%
      • Executive staff members = 7.5% of annual salary.
        • Team bonus = 1.875%
        • Individual bonus = 5.625%
      • Team defined as the members of the executive staff reporting to the President and the Board.


  1. Middle management allocation
    • 4 % of annual salary
      • Team bonus = 1.0%
        • Team defined as the total of all the people they manage
      • Individual bonus = 3.0%



  1. General staff allocation
    • 1 % of annual salary
      • Team bonus = 0.025%
        • Team defined as the department they work in.
      • Individual bonus = 0.075%
    • The percentages listed above are meant to be initial allocation of money based on a percentage of payroll. It is neither a minimum nor a maximum. The team or the individual could receive more or less than the allocated amount.
      • For example, in middle management, a person earning $100,000 per year is generally eligible for $1,000 team bonus (1%) and $3,000 in individual bonus (3%). The team could meet its budget and get the team bonus, or they could miss the budget and not receive anything. The individual might receive $3,000; more or less depending on their performance as measured by their individual PDP (Performance and Development Plan)
      • PDP ratings are based on 100 points spread across KPIs/goals, tasks, behaviors and personal growth plans.


  • The President and the Executive Staff will receive an overall bonus pool from the Board based on these general allocations. It is up to the Executive Staff to determine if an individual is to receive more, less or equal to their generally allocated amounts based on their PDP achievements.


Suggested approach total executive long term compensation.  


Long term executive compensation is based on achieving the targeted numbers.

  • President = $xxx per point achieved (20% of annual salary)
  • All other executive staff team members = Total of $xxx per point achieved in this example.
    • “Joe” = $xxx per point (10% of his annual salary)
    • Bill” = $xxx per point (10% of his annual salary)
    • Susan” = $xxx per point (10% of his annual salary)
    • Thus, each executive staff member would have the ability to earn approx. $20,000 in long-term compensation. (100 points x $200) (3-year payout or $6,666.66/year)
  • Total initially allocated for the executive staff of $xxx,xxx in long term compensation. The initial impact would be 1/3 or $xx,xxx in the first year with the remainder deferred.
  • If the team or any one person significantly exceeds their targets, then there would be an ability to increase the dollars per point without having to change the targets or the system. We can set the system up so that there is a correlation between targets reached and dollars per point.
  • The targets should be set so that the shareholders (owners) receive additional “profit” beyond what was expected in the budget. The idea is that the shareholders will share a portion of that “profit” with the executive team that generates the money.  The more the shareholders make the more the executive staff makes.




  • Payout dollars will be established at the end of the year and paid out over the next 3 years; 1/3 the first year; 1/3 the second year; and the last 1/3 of the payout dollar in the third year. To initiate the overall process this is how we will begin.
    • The first year this payout number will be based on achieving a 1 year target.
    • The second year this payout number will be based on achieving a 2 year target.
    • The third year this payout number will be based on achieving the 3 year target.
    • In all subsequent years, this payout number will be based on achieving the rolling 3 year targets as established between the Board and Executive Staff.
  • Each point in the long term bonus pool would be equal to a fixed dollar per point at a target of 100 points. Each individual would know the value of their points and could calculate the impact that exceeding the targets would be to their personal income.
    • Thus if the executive team earned 110 points and the individual’s point value was $190 per point they could receive $20,900 rather than $19,000.
    • That would occur only if they were to deliver an incremental value to the shareholders above the targets set; which is, of course, higher than the accepted budget.


  • There would be 5 KPIs for this Long Term compensation process.  Each KPI would be assigned points depending on the importance of the KPIs to the Board.
    • Net Profits = 40 points
    • Sales Revenue = 15 points
    • Gross Profits = 20 points
    • Variable costs =  15 points
    • Customer Satisfaction = 10 points

8 Rules for Office Workers in 1872

Recently the following “Rules for Office Workers” were unearthed by an office manager cleaning out in preparation for a move to a new location. They were reported by a Boston newspaper. And they’re real, not invented or exaggerated. The Harvard Business School confirms that plenty of offices had such working conditions in 1872.

8 Rules for Office Workers in 1872

  1. Office employees each day will fill lamps, clean chimneys and trim wicks. Wash windows once a week.
  2. Each clerk will bring in a bucket of water and scuttle of coal for the day’s business.
  3. Make your pens carefully. You may whittle nibs to your individual taste.
  4. Men employees (Editors note: There were rarely any women doing office work at the time) will be given an evening off each week for courting purposes, or two evenings a week if they go regularly to church.
  5. After thirteen hours of labor in the office, the employee should spend the remaining time reading the Bible and other good books.
  6. Every employee should lay aside from each payday a goodly sum of his earnings for his benefit during his declining years so that he will not become a burden on society.
  7. Any employee who smokes Spanish cigars, uses liquor in any form, frequents pool and public halls, or gets shaved in a barber shop, will give good reason to suspect his worth, intentions, integrity and honesty.
  8. The employee who has performed his labor faithfully and without fault for five years will be given an increase of five cents per day in his pay, providing profits from business permit it.


Get a positive return from signing bonuses

Try these tactics to increase their effectiveness

Posted: April 23, 2015


Many employers offer some kind of signing bonus to new employees, which can aid recruiting efforts in tight labor markets without exploding the salary schedule.

If you decide to employ signing bonuses, try these tactics to increase their effectiveness:

• Target bonuses carefully. Tailor them to individual hires, not every new employee, and regularly evaluate the labor market so you don’t offer bonuses you don’t need to.

• Spread them out. Stagger bonuses in two or three payments over a year or 18 months to maximize the honeymoon period while minimizing the financial hit if the hire leaves prematurely.

• Don’t add strings. You may be tempted to require employees to pay back bonuses if they leave within a certain number of months. But such provisions can be a hassle to enforce, and create bad will. Consider keeping the time frame as short as possible to ensnare only the worst job-hopping offenders.

—Adapted from the Workforce Management Online and Career Journal websites

Enemies of Productivity

  1. Mismatching compensation and productivity
    1. Need to tie measures into dimensions that a department can focus on
    2. Revenue per employee
    3. Profit per employee
    4. Compensation should be a function of productivity and rise and fall with individual results
    5. In other companies, comp is driven by the importance of the job or by tenure
  2. Hiring the Wrong People
    1. At a brokerage company – first year turnover 30 % for candidates referred by other employees
  1. 45% of college recruits
  2. 55% coming from newspaper ads
  • 67% for brokers recruited from competition
    1. If first year turnover was above 50 % in this company, the company destroyed value
  1. Short bonus cycles
    1. Today’s decisions but tomorrow’s profit and the people who make the decision won’t be around to reap what they have sown
  2. Crazy Career Paths
    1. Skip the position that actually creates value.
      The branch manager for example. Don’t reward by tenure or number of people under supervision as the sole basis
  3. Inadequate training
    1. Getting the best to train the newest
  4. Ignoring the difficulty of the job
    1. Watch the average income per hour for your key employees. Unless it is stable or increasing in real dollars, you are almost certainly attracting lower caliber applicants
  5. Layoffs
    1. Layoffs lower productivity in some cases decimate it
    2. Check the customer defection rate
    3. Layoffs raise the level of uncertainty among employees and customers alike
    4. In a service economy, a layoff can affect customer retention so quickly
  6. Low growth
    1. The only way to keep the productivity ratio healthy is by growing revenue at a rate that is even healthier.
  7. Inefficient organization structure

Organize as much value adding activity as possible into small teams whose productivity and profitability can be measured

Compensation principles

  1. Compensation is a combination of many reward systems including salary, bonus, benefits, pension, recognition and working conditions. Some of the rewards are tangible and monetary. Some should be thought of as intangible or non-monetary.
  2. Salary is intended to cover the reasonable day-to-day living expenses of the individual.
  3. Benefits should be calculated as a percent of total salary. People need to be informed about just how much money your company is paying them in “hidden” benefit costs. Typical “hidden”costs of benefits can range from a bare minimum of 15% for Social Security and Workman’s compensation costs to 30% and even 40% of salary based on pensions, vacations, holidays, medical, and other benefits provided.
  4. Bonus is intended to reward individuals who contribute to the overall profitability of the company based on their performance.
    1. There should be a team bonus based on the achievement of team to the profits of the company and the teams performance. Team bonuses should be awarded to everyone on that team as a percent of salary. There should be a minimum amount of profit achieved by the company before any team bonus is paid. Thus the company receives the first % of net profit (To Be Determined). Then the profits that remain after that are available for distribution based on a formula – say 75 % to the company and 25 % to the team.  The amount of money to be distributed should be based on the overall principle of “great risk – great reward; medium risk – medium reward;  low risk-low reward”. The owner has taken the greatest risk and should receive the greatest rewards when they are available.
    2. There should be an individual bonus process based on the achievement of the individual to the profitability of the company and his or her performance. In theory, even if the company does not make a profit … an individual acheives their objectives and goals and produced a demonstrable profit … then the individual can get a bonus for their results. Individual bonuses should be awarded based on the achievement of their PDP results.
    3. Bonus distribution between team and individual – There is no “magic” number, but the recommendation is 25% of the bonus should be in team bonus and 75 % of the bonus should be individual.
  5. How to determine the performance level? The company needs to establish the performance criteria that would result in acceptable levels of success. Success is defined in many ways. Sales dollars, Net profit $ and as a % of sales, customer satisfaction, number of installations completed on time and under budget, AR at acceptable levels, and employee satisfaction could be a number of the criteria. The actual indicators of performance and success were initially determined during the business planning process. These should be translated into a management report that is available to the entire company so that everyone can track the progress of the company and their own personal progress. Targets should be set that are stretch goals, yet still remain realistic and attainable.

  6. How to determine the amount of money that should be available for compensation and bonus? A budget needs to be created. This should establish a realistic amount of profit and the other targeted numbers from our balanced scorecard. The budget must be a conservative target. It must be the number which can realistically be achieved during the year. The stretch goal should be set at a point above that conservative budget. The budget should include a reasonable profit level based on past performance and the expectations of the marketplace. When the company exceeds the budget, the money available is extra and unanticipated. The bonuses paid to the individuals within the organization are, in essence, “free”. In other words the budget achieves the profit level acceptable to the ownership. The bonuses paid are above and beyond the acceptable profit level. Bonuses come out of the extras that are achieved and not the core amount. Bonuses paid in this instance should be generous as possible.
  7. Establishment of salarySalary pays the basics of living. Increases in salary should be for 4 reasons:

(1) Adjustment for market conditions — COLAs – Cost of Living Adjustments,

(2) Demonstrated increases in the number of tasks performed,

(3) Demonstrated efficiency in the current tasks assigned, and

(4) Demonstrated enhanced levels of responsibility and authority.

COLAs should be granted at the same time each year say on January 1. Everyone in the company should receive the same increases. They should be called “Loyalty increases” based on each person’s continuing loyalty to the company by being around for another year. COLAs should be developed from the Department of Labor’s reports for the region, for the industry, and by function.
The concept of “loyalty” also comes from the principle of “building your plan from the customer back”.  It is rare indeed that the customer comes to your company at the end of the year and says, “You did such a good job I am going to ask you to increase your prices to me by 5%”. If the customer doesn’t do that, why should the employee be entitled to a guarantee of 5 % or any other percentage just because they are working another year at the company. The increase should be based on their increase in the productivity which allows the company to charge more to the customer because of increased value provided. “From the customer back, and not because it is convenient for the company.”
So we need to balance the employee expectations of “guaranteed” increases with the reality of the business and the expectations of the customer. That is why a COLA increase based on the real Cost of Living should be modest and the individual’s real money comes from their increased productivity. Overhead remains in line. The customer is served. The employee is treated fairly.

Associate Recognition

People go to work each day … yes for the money … but also because they want to be a part of something more than themselves. They need to be recognized for the things they do each day to make your business and organization a little bit better. Each organization should create simple clear programs to provide both monetary and non-monetary incentives for each person, especially those not involved in any management incentive program.

The “MaryAnn” principle is simple but effective: “Small rewards regularly earned is better than large grants occasionally given.” Our programs are based on that simple but effective principle. Talk to your people. Share with them your appreciation of the importance their presence has in the success of your business.

TalentValue has a unique associate recognition program that provides a way to reinforce and encourage the type of behaviors and activities that supports the short and long-term direction of the company. It is a computerized process of rewarding points for good behavior… the kind of behavior you want to encourage in the workplace… and tracking your people’s accomplishments in a simple and effective way. This is a program we would like to share with you.



TalentValue                                                                            www.Talentvalue.com

6 Westcross Road                                                                   Tele # 973-420-4964

Savannah, GA 31411                                                               e-mail: doug@talentvalue.com

4 Hidden Signs of a Healthy Company

By Margaret Heffernan

Your balance sheet alone won’t tell you if your company is thriving or on the verge of failure. Here’s what you really need to look out for.

Years ago, I asked my lead investor how he could keep track of all the companies he invested in. “It’s simple,” he said. “I just look at the numbers.”

But numbers don’t chronicle morale, low ethical standards, obsolete technology, or time-consuming politics. By the time the balance sheet reflects these problems, it’s too late or very expensive to act. So it left me with the abiding question: how can you tell a healthy company from a sick one?

Organic talent

In healthy companies, employees are highly committed and tend to stick around, so turnover exists but isn’t high. More importantly, at healthy companies you see a lot of movement up through the ranks. This reveals people are staying because they’re growing, and not because they’re afraid to leave. The most striking case of this I’ve seen is a receptionist who eventually joined the company’s board. She was able to do so because business growth created opportunity and because both were encouraged through training and support. She was by no means an isolated case. By the time she was on the board, there was of course nothing about the company she didn’t know.

Constructive conflict

Great companies handle conflict well. Their leaders expect, want, and respect conflict and debate. When challenged, they don’t look shocked or affronted because they welcome the engagement that conflict requires. The very best leaders deliberately create structure for conflict: they appoint devil’s advocates to challenge mission-critical decisions; they get executives to change places so they can argue from different perspectives. They appreciate that conflict is the mechanism through which organizations do the best thinking, and can only do so by being good at it.

Outside lives

Companies that require face time and measure commitment in hours burn people out. If you see employees stay late (but they’re not very busy), or if staffers regularly assume that everyone will work through weekends, you have a problem on your hands. If, on the other hand, employees are encouraged to go home and have a life, you’ll typically find high levels of productivity and creativity. Why? Because the richness of those lives collides with the discipline of work to generate new insights and ideas. Conversely, people who are overworked develop tunnel vision, and all they look for is an end.

Sane pay

Healthy companies pay well, but not too well. Most importantly, they eschew performance-related pay. This doesn’t mean that they don’t reward success; they do. But those rewards more often take the form of public accolades, extra vacation time, learning opportunities, or extra resources. All of these rewards fuel and enhance creativity so they keep everyone focused on the larger motivations that make companies successful. People stay and do good work because it matters.

Whenever I visit companies–which I do as often as I can–I look for these vital signs. When I don’t find them, I worry, even if the company’s doing well. The downside of not having these qualities isn’t obvious at once or even quickly. But sooner or later the best people leave or burnout. The leaders don’t get good advice–or, sometimes, any advice–and they easily mistake silence for harmony. Everyone’s working hard but rarely well. And the best people are invariably interviewing elsewhere.

The balance sheet may look great but it’s showing the past, not the future.