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.