Demystifying the complexities of employee compensation

Stock options can definitely be a great tool in retaining the staff with the right attitude.

SMEs have a knowledge gap in one area related to compensation and benefits (C&B). It is often entrusted to the so-called experts even by large enterprises. Big global consultants conduct benchmark studies on compensation and the exercise is repeated at frequent intervals. SMEs do not have the luxury of infinite cycles of data collection and analytics.

Often, SME employees wear multiple hats and hence the task of fixing compensation becomes even more tangled. At the same time, this is a core issue that needs to be tackled. What are the factors that need to be considered so that SME leaders get the compensation balance right?

In our coaching practice, we always look at the markers that indicate the attainment of goals. What are the markers for a good C&B strategy? The objectives of compensation management are to attract, engage and retain employees through competitive compensation plans that align with the company budget, corresponding job market, and government regulations.

Good compensation management should be able to attract talent, retain existing talent and motivate them to be engaged and productive. All these have to go in tandem and there is no pecking order in terms of good-to-have criteria. These objectives can be measured against the following benchmarks:

Are you following the labour laws in spirit?

To begin with, following the letter of the law is the minimum bar. This is one area where the administration and compliance can be outsourced to consultants. Going beyond that is not an administrative requirement but is a mindset that treats people as more than just resources.

Is there a balance in pay structure reflecting the contribution of either the role or the multiple roles being played by an individual?

This requires an analysis of various roles in terms of job content and its connection to the overall company strategy. Not all roles can be quantified in terms of contributions. There may be roles where turning up regularly may be a particularly important criterion.

Does the company share its financial success in a proportionate and equitable manner with those who played a role in it?

Stock options can definitely be a great tool in retaining the staff with the right attitude. Give it to those in critical roles. Giving a small number of options to a large number of people is a wasted effort.

Are you doing pay disbursal in a timely manner?

Timely disbursal of salaries and entitlements is very crucial. We know of a few SME owners who had ensured provision for salaries for employees as the first thing even in a dire financial crisis. After that only come even utilities and other payments. It is not just the money – timely leave and a certain amount of work flexibility will also help in retention.

How tax-friendly is your pay structure?

The intent is to make the structure tax-friendly so that employees get more cash in hand.

1. The appropriate mix of fixed pay and performance incentives in the form of variable pay.

2. Develop and sustain a high-performance culture by giving flexible benefits that have the highest perceived value to employees. Let them choose from a bouquet of benefits like pension, medical insurance, accident insurance, term life insurance, or for some millennials, even pet insurance.

3. SMEs have the advantage of speedy decision. This can be leveraged to anticipate how the employee context, priorities and preferences would evolve and offer modern benefits that can attract talent. Benefits that are funded by the employer but customised by the individual employees according to their needs (within a set specified amount) will help maximise the value of compensation.

Do you have consumer-oriented benefits?

These are the kind of benefits that are paid by the employee as a bouquet of offerings from which the employee makes a limited selection. Here, employees get a set total value to spend on their own, allowing them to customise their benefits to what work best for them. This empowers employees to make decisions based on their personal context so that they can gain the maximum value from these benefits.

What about long-term retention?

There will always be attrition but keeping it below the industry average is the aim. Zero attrition is not the best benchmark to have. The rate depends on job role, industry, location and many more variables. There should be a clear rationale and strategy for compensation based on roles, responsibilities, and contributions. This has to be communicated clearly and openly with all the employees so that people feel that they are paid equitably.

It is often said that someone joins a company for the compensation but leaves because of the boss. This is about culture and an altogether different topic for more articles.