Continuing from yesterday on compensation basics.

Q: What’s the best way to handle extra compensation for a few stars?

A: There isn’t one. I’m sure that other experts would disagree with me, but I really hate the idea that it’s only important to take care of your so-called star employees and everything will be fine (or that you should only hire stars). I keep telling my clients, do the math.

Let’s say that you have 50 people in your company and you consider five of them to be stars with compensation 10% higher than their peers. The result is two-fold. First, you can expect the peers to start looking and you can count on turning most if not all of them within the next 12 or so months. Second, as word gets around the company, the rest of your people will start wondering how fairly they are being/will be treated and you can count on turning another 10% or more. The total cost of replacing people is pegged at 1-4 times the person’s annual salary.

As I said, do the math and then decide what to spend on a star.

However, you can set up an incentive plan as long as it isn’t skewed to favor your stars (you might also be surprised at who actually wins it). The best incentives are paid for achieving company goals and somewhat dependent on the rest of the team.

For example, we structured a bonus for a project manager handling multiple projects, both short and long-term, based on projects completed the prior month. At her annual review the project manager had already agreed to a company goal of 90% of projects on time, in budget and in quality over the year. The bonus was 0.5% of the total value of projects meeting those same criteria. We also allocated $500 per quarter for completing all of her quarterly goals—pro-rated if fewer were completed. This assured her that there was at least $2000 in incentives that was completely under her control.

The PM understood that the majority of her bonus was dependent on the engineering team, but since achieving those goals were part of her job description it made sense to base her incentive on the teams performance.

Developing fair compensation practices isn’t rocket science, it just takes a bit of thought—as opposed to doing what’s easy or caving in for short-term peace. And you have a great yardstick to measure the fairness against—yourself. Would you have been happy if your compensation had been done in the same way when you were in a similar position at that point of your career?

No? Then don’t expect others to be happy now.

This entry was posted on Thursday, June 1st, 2006 at 10:37 am and is filed under Business info, Compensation, Culture, Motivation, Retention. You can follow any responses to this entry through the RSS 2.0 feed.
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