Ask HR Bartender: Developing a Compensation Plan

I received this question from a reader about a subject near and dear to all of us…money.  Specifically, our paychecks.

We’re a startup company looking for advice on how to competitively pay new hires.  Obviously we can’t use the content we find on the internet because that usually applies to larger companies. Any tips on how to formulate a compensation plan for someone in sales at either the entry or VP level?  I know equity can play a role, but not always.  We just want to find out what’s fair and what’s not.

Because developing a compensation plan can be complicated, I reached out to Tom McMullen, vice president and North American reward practice leader at Hay Group.  They’re a global management consulting firm that works with leaders to transform strategy into reality. Theircompensation, startup compensation practice has been around for over 60 years.  Bottom line:  they develop talent, organize people to be more effective and motivate them to perform at their best.

Tom, for our readers who have never created a compensation plan before, can you share with us a high-level overview of how pay is determined?

Every organization needs to have a reward strategy, which covers the labor markets you compete in, the target level of pay in those markets, as Hay Group, Compensation, Startupwell as the mix between base salary, short-term and long-term incentives and benefits.

After establishing your strategy, you’ll want to measure the market via benchmarking surveys relative to this strategy and determine how the jobs in your organization compare to the market.  Then develop some structure around the findings, typically by establishing base salary ranges, target incentives, benefits, perquisites programs and related administration provisions such as new hire guidelines, promotion guidelines, base salary increase guidelines, and incentive plan designs.

Lastly, you need to create an effective communication plan to share all of this with your employees and managers.

What are the factors that impact compensation?

There are several key factors that organizations use to set their compensation earning opportunities for employees.  They include industry sector, company size, profitability, ability to pay, performance relative to peers, management’s view of reward strategy and compensation mix.

The role that the individual is in (e.g., support, professional, management, executive, etc) and the impact of the role on end results will also impact pay opportunities within a job hierarchy.  Individual and company performance will typically impact yearly base salary increases and the size of incentives.

I’m sure people have told you there are websites that say their salary should be XX.  What suggestions would you give someone who is evaluating salary information on the web?

The value of the information often correlates with what you pay for it.  While free compensation information may be viewed as better than nothing from the employee’s perspective, the vast majority of organizations set their compensation programs based on quality assured third party sources of information that they purchase from respected vendors.  This external benchmarking information often reflects the organizations desired peer group (e.g., similar industries, company size, jobs, etc).  As such, most human resources functions view information freely available from the web as useless.

What are the advantages to using an outside firm when establishing base salaries and bonus structures?

The benefits include access to external benchmarking data often not available elsewhere, expertise in the profession and the industry and an unbiased view as to what is most appropriate for the organization.

I know Hay Group just published their annual CEO compensation study.  Do you have any additional resources regarding sales team compensation that you can share?

Absolutely, here is the Hay Group’s report on sales incentive plan design, a sales incentive fact sheet, and a case study (PDF) on predicting sales performance.

Many thanks to Tom for sharing his expertise and vast resources.  As you can see, compensation doesn’t take a one-size-fits-all approach.  If you want to do it right (…and trust me, you do), then it’s important to realize when to get the experts involved.

If you would like to learn more about Hay Group, you can check out their blog and follow them on Twitter.  They have over 2,600 employees working in 85 offices in 49 countries and service a wide spectrum of clients in private, public and not-for-profit sectors, across every major industry and represent diverse business challenges.  And don’t forget to check out the Hay Group and Wall Street Journal 2010 CEO compensation study.  Very fascinating stuff.