Over-Compensating for Compensation Plans
Employees understand and expect that comp goals will change. They also understand they don’t have much input into the process. But they have a keen sense of fairness, and when a new comp plan doesn’t feel fair, they’re likely to look for other opportunities, even if they’re able to meet performance. A recent LinkedIn survey indicates that 61% of employees already plan to leave their jobs in 2023. If your workforce is young, you can expect even more turnover. About three-quarters, or 72%, of Gen Z are thinking about quitting; 66% of millennials are also ready to move on.
We’re hearing from a number of unsettled workers in the staffing industry about major changes in compensation plans. Employers, trying to meet profit goals, are changing incentives and pay structure, and the changes are making some of their best performers consider other options.
We’re not surprised to hear that employers are making a shift away from the very generous comp plans and over-the-top offers they made during the pandemic. They were concerned about retaining their top talent and hiring during the aftermath, when unemployment reached 30-year lows and many workers were choosing to drop out of the labor force altogether. However, those generous comp plans are causing problems for some companies.
Another reason for change is leadership teams often believe that changing compensation plans is a way to motivate growth every year. But many employees see aggressive new goals as punishing success. When you have to work twice as many hours to earn what you did last year, or learn that your performance improvement nets you almost no significant increase in compensation, you become frustrated and de-motivated.
And it’s the best performers who are the first to do the math and consider moving on.
I have a lot of experience with compensation plans, job family banding, market analytics, merit increases, and structuring a host of variable performance plans. I understand what misaligned compensation plans look like and feel like. In a word, they feel unfair.
As a manager, when you’re making changes to your comp plan, here are some things to consider. An effective plan allows average performers to meet their goals and rewards top performers well for exceeding them. Some management teams are not concerned with incenting average performers, but by definition, they make up a large part of your team. And the current labor shortage makes them hard to replace. If they feel their goals are unachievable, they may very well get discouraged and decide to walk away rather than strive to meet them.
If the compensation strategy is structured properly, it results in a defendable process that most people feel good about. In the end, determining compensation plans involves the following:
- Guiding principles to define the strategy, which is agreed upon by the executive team
- Analyzing the performance of the plans and payouts
- Research in the form of market studies and competitive comparisons
- A communication plan that transparently shares findings, strategy and timeline
- An open door in the event there are issues to discuss
Fairness to employees as it relates to compensation is about transparency, process, reason, and communication. With every compensation plan, when you have done the work, you should be able to ask yourself: can I defend every component of this? If you are able to answer yes to that question, you will find that many of the “unfair” parts of the employee experience subside.
Offer additional support when you make significant changes to goals. Some of your employees may have been succeeding while using less effective techniques or struggling with time management. Offering individual evaluation and training can help them build confidence and productivity. (Just make sure you’re not perceived as making it harder to make their goals because they have to spend time in training instead of on selling.) A good plan will also estimate how many new prospects, calls, and meetings it will take to achieve the goals; every rep should have a good idea of how they need to change their activity to meet performance.
Finally, don’t expect reward trips and other bonuses to buy loyalty. As soon as a comp plan is changed to something that is perceived as unfair, it negates any goodwill established from past activity and rewards. This perception can be the motivating factor that ignites the search for a new job, and there are plenty of desirable companies with realistic, attainable and rewarding compensation structures.
About the Author:
Rich Thompson, CEO of XPG Recruit, is an expert on staffing, human resources, training and leadership development. XPG Recruit provides recruiting for staffing companies. The XPG Recruit Athlete division places former athletes into business careers and works closely with universities through its sister company, Podium X.
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