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The Best Compensation Model (Pay for Culture)
Me: “Why did you come work for us? You were at your last job for 6 years and you seemed to be enjoying it.”
Recent Employee: “I trained a new employee at our company doing my same job and I found out* they were making $20,000 more than me. When I asked my boss about it, he said he couldn’t give me a raise. That person came in at that salary and has 4 kids to feed (while I was single). As much as I liked my job and my friends, I just couldn’t work there anymore after that.”
* They always find out
Good employees won’t leave for just a little more money, but they 100% will if your compensation system isn’t treating them fairly. I can guarantee that, unintentionally, you are driving along with at least one or two, but probably many employees with the compensation check engine light “On” right now.
Compensation problems happen individually and over time.
It’s the person you promoted to a leadership role that didn’t make it as a leader, who you reassigned and kept their pay the same.
It’s that person who is killing it and their compensation hasn’t kept pace with their responsibilities.
It’s the employee who has been in the same job for 10 years compounding at 3% annually, who is now the highest paid employee in that area by default.
It’s the person who you urgently hired recently for way more money than members of your existing team.
In the moment, you did what you had to do. Each decision you made seemed right at the time.
The problem is that these independent decisions, when looked at collectively and over time, can appear anywhere from inappropriate at best to outright discriminatory at worst. Most leaders who find themselves in real trouble in the area of compensation, likely didn’t get there with one decision. In fact, it was probably unintentionally, with many decisions stacking up in the absence of an overarching plan.
So, if decisions and situations like the examples above are compounding to make a potentially serious problem, you should be doing some urgent maintenance. Let’s take this compensation problem to the shop, tomorrow or this weekend and get it fixed.
What may have been a 50-200 hour project can be completed in an afternoon or one day max depending on the size of your team. We have already done the heavy lifting for you by providing a fully built out and tested model that incorporates the feedback from dozens of organizations. There’s no excuse to not make this a priority!
Download the compensation model that fits your team size (25, 50, 100, or 200 employees) below and let’s get started.
The Two Simple Factors For A Transparent and Fair Compensation Plan
Your compensation plan should be built on the foundation of the following two factors:
1. Market Based Compensation For Each Job Title. The market will determine the potential range of compensation for each role in your organization.
2. Pay For Performance. The strength of the employee’s individual performance in their role will determine where they fall in the market based range and their rate of increase within that range.
It’s that simple. We recommend calling your model something like “Pay For Performance” because that’s what people will understand. You know from our previous posts though, we are actually going to be paying for culture (Core Values + Results). We will always be requiring both performance/results and core values behavioral measurements to be acceptable for every individual to receive a raise.
Step #1 - Export Your Existing Employee Compensation
Your payroll software or your payroll provider should be able to pull an export of this information for you. Specifically you will need:
Employee Name
Employee’s Job Title
Employee’s Annual Base Pay
An additional, non-required field that can be very helpful for analysis is:
Employee’s Manager
Once you have this info you can paste it into the first tab of the Threads compensation model.
Step #2 - Enter Your Current Pay Range For Every Job Title (Minimum, Maximum and Median)
If I had to hire someone today to fill this role, what is the minimum and maximum I would pay? The pay range for the job title is market based, so you should complete this step independently, without looking at the existing compensation for anyone at your team.
There are numerous ways to develop your pay ranges from paid or free sources. If you don’t currently have this information, take a few minutes to read up on How To Find Accurate Market Based Compensation Levels. Free, accurate wage data is more readily available than anytime before. If you need some extra motivation to finish this project, remember that your employees increasingly have access to this data too.
The “Base Median” column is optional. The median column will default to an average of the “Base Minimum” and “Base Maximum” if you leave it empty.
If you aren’t exactly sure on some job titles, fill in your best estimates. Getting reasonably close with an estimate is perfectly fine to start. You can always refine this information later and you should periodically benchmark your compensation range estimates at least annually.
Step #3 - Enter Your Employee Review Scores
Export your employee review scores from the review system you are using and enter them into the compensation model. The model has two columns for review scores: (1) Core Values and (2) Results. You are separating the behavioral criteria from the performance criteria because success in both areas needs to be required to get a raise.
You may have a review system that requires both of these measurements and this step will be easy. If your review system mixes and averages these criteria together, you will need to separate them. For example, your reviews may have a section related to core values or behavioral based items and also a section related to performance (ex- goals, KPI’s etc.)
The compensation model bases scores off of a 10 point scale, with a minimum of a 5 point score out of 10 to be eligible for a raise. If your review scores are based on 1-5, just double them to convert to the 10 point model scale. The 10 point scale is used in the model to get some differentiation between employees who are performing well, but are tightly clustered around “3 - Meeting Expectations” on a 5 point scale.
If you don’t have a review system, a system that uses non-scoring methods or if your review system is just worthless :-), here is a process to help you quickly and accurately estimate review scores for everyone in less than 30 minutes.
Step #4 - Adjust Your Raise Increase Percentages to Fit Your Payroll Budget
Now that you’ve entered your information, the compensation model will do the hard work of determining the wage increase amounts for everyone on your team.
The only adjustments you need to make are to the standard increase percentages at the bottom of the sheet. Your overall payroll increase is highlighted in RED. You can adjust the increase percentages until your team’s total payroll increase fits within your budget for the year.
The model will also give you some pay recommendations outside of the standard percentages for most employees. Some of these may seem incorrect at first, but look closely at the amounts and reasoning in the model and read Step 5 below before making any changes. These non-standard increases are the compensation imbalances that you need to develop a plan to address.
Step #5 - Develop A Plan For Any Non-Standard Compensation Changes
The majority of your employees should be in the standard increase categories. These employees are being paid fair market based rates for their work and their increases should match their contributions to your organization. These employees will generally be satisfied that they are being compensated fairly.
You need to pay very close attention to the non-standard increases or employees who are not receiving raises today and develop an action plan to communicate with each individual. These situations are the people you are in danger of losing or the people that in the past may have been rewarded when they should not have been.
Here are some sample plans to handle the common compensation problems you have:
High Performer Who Is Underpaid And At Risk Of Resigning
Solid Employee Who Exceeds The Pay Range For Their Job
Employee Who Needs To Improve Their Performance To Qualify For A Raise
Step #6 - Communicate with Confidence
What you are doing makes sense. It is consistent. It’s fair. It’s simple enough that you can explain it and people will understand it.
This gives you the confidence you need to communicate with your supervisors and ideally everyone in your organization about compensation. It will build support for you as a leader and create trust in the culture of your organization.
If you have questions or potential issues with the compensation model (commission based structure, profit sharing model, etc.) check out our Comp Model FAQ.
If you have suggestions for the model, email us here.
How to Retain an Employee Who Just Resigned
How are you feeling right now manager? We know, it feels terrible. The training, their potential and the work they were doing… and that is only the beginning. Then you must post, interview, hire and retrain. It is a disaster, it is going to be expensive, and you have two weeks to try and fix it. What can you offer or say to get them to reconsider?
1. Find out why they are leaving. Their first reason will likely be the easiest and most simple way to not cause hard feelings. Really find out why.
2. Be honest with them. Chances are, them leaving has something to do with your lack of action or follow through. Admit your mistakes. Humility is important.
3. Ask them if there is ANY chance to keep them. If there is a chance, focus only on what you learned from item number 1 above.
4. Do what you are going to do FAST. You do not have 2 weeks; you have 1 day. Every day that goes by, leaving becomes easier for the employee.
That Is What You Wanted To Know, Here Is What You Need To Know
We got some good news and bad news for you. The bad news first… you messed up and took them for granted. They have another offer in hand. Realistically at this point it is probably too late and there is nothing you can do to get them to stay. I know this isn’t what you want to hear right now, but it’s the truth.
Now for the good news… the crisis is giving you an opportunity to focus on and fix the compensation issues or other problems that got you making this search today. Remember, people leaving for more money is a symptom of a bigger problem you have been too busy to tackle. One day of work now to not have to go through this again.
Also, if you are new to Threads, all the steps, models, etc. are free to read and download because we want to help you with your culture. Everything you need to solve this problem starts right here in our compensation plan.
1. Why You Won’t Be Able To Get Them To Stay
If the employee has put their two weeks in with a better offer, they know two things:
What they are currently worth on the market
That you did not value them enough to pay them what they were worth
This is why matching the offer, beating the offer, following through on promises you made but never kept, and coming up with a career plan for them now is wasting your time. They will listen and possibly even appreciate the confirmation of what their new offer has already told them. They know though, that you are doing it for yourself / what you are losing, and not ultimately for them. If it was for them, you would have done this already.
2. How To Handle The Resignation Like a Boss, NOT Bill
Once the person is truly leaving, and you can’t prevent it… stay classy. Be honest, take ownership and apologize if you would have been willing to pay them more now than before they put in their two weeks.
Your conversation should go something like this:
“We are really sorry to be losing you. We messed up and apologize for not following through on (ex - raising your pay at the rate your contributions increased, giving you a more defined path to partner, etc.). We should have done right by you when we had the chance. It sounds like you have a great opportunity. We are happy for you. If there is anything we can do let us know and please stay in touch.”
At the very least they will respect your honesty. Doing this will keep the door open for the future if you think there is a chance you will want to hire them back. Their new employer is most likely going to make the same mistake you just did with their compensation a few years down the road.
When that happens, you will have done the work to either show them you’ve learned your lesson, or you will have already attracted someone better.
3.Stop Making Excuses About Why They Left
Many managers we talk to suffer through this turnover problem over and over and start making excuses.... “Those damn millennials have no loyalty and work ethic,” “This is just a position with high turnover,” “This other company has benefits we can’t match.” None of that’s true in our companies, and it doesn’t have to be for you either.
In this case it was your compensation plan. It could also be that they are leaving their manager or that you knowingly have them working with a rotten manager that you are too scared to deal with. DING! DING! DING!… One of these 2 reasons is often the real reason they are leaving.
Every generation and group of people in society all want the same things at the core. All of these turnover problems can be fixed with a small time commitment and some courage from you. No excuses. Excuses are for cowards.
4. Identify The Underpaid People Who Are Leaving Next
The next person to leave your organization because of compensation will be a solid employee who is paid at the lower end of the pay range for their job title. This is true because they are a good employee and will be in demand in many other places. They currently don’t know their worth on the market or they do know and are being patient with counting on you to recognize it. Either way the clock is ticking.
While this seems obvious, I am willing to bet you have 1 or 2 or more employees in this situation within your organization right now and until today you weren’t actively doing anything about it. Changing jobs is disruptive, risky and a pain in the ass. These employees probably don’t want to leave, unless you make them.
To identify these people who are at risk of leaving next:
Develop accurate market based compensation levels for every job title you have
List your employees and their compensation
Flag the people below the median compensation for their job title
Now that you have your list, you can decide to win the battles months before they are ever fought.
5. Pay People What They Are Worth, Without Them Having To Ask!
Now that you have your list of underpaid employees compared to their market rates, identify the ones that you would be very sad about if they left tomorrow.
Make a plan for each underpaid employee to communicate their value to you and your team. This may include discussions of career planning, but should definitely include a raise to where they should be paid or a clear plan to get them there over time. Great employees, regardless of tenure, need to be at least equal to the MEDIAN WAGE of the range for the position they have.
But, but, I don’t have the money to pay great people more? LOL, of course you do… you are just spending it on the wrong people or things.
As bad as you felt having that resignation conversation yesterday, you will feel 180 degrees opposite after rewarding these employees unexpectedly. These conversations will motivate you as much as they motivate the employees who are now being treated fairly.
And guess what? Your action today will also fix your recruiting problems when these employees tell their friends working other places.