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“Research indicates that workers have three prime needs: interesting work, recognition for doing a good job, and being let in on things that are going on in the company.” – Zig Ziglar

ar from just paying people a standard wage or salary and providing the bare minimum in additional benefits that are required by law (such as company-funded superannuation and basic leave entitlements), your remuneration strategy should help you to attract the best people, to get the best performance from them once they’re on the job, and encourage them to stay with you for the long term.

A strategically planned remuneration system can be a powerful tool for engaging your employees in the achievements and performance of your business, and for rewarding them for their contribution to its results. It should:

offer a real incentive to employees to achieve targets

  • enable people to share in the value they create for the organisation
  • assist employees to achieve their own financial and lifestyle objectives.
  • What are you telling your staff by the way you pay them?

Transforming employees into committed stakeholders in your business means developing a remuneration system that reflects your organisation’s philosophy, objectives and values. What many small and medium-sized businesses don’t fully appreciate is how their remuneration practices influence the thinking, behaviour and performance of their staff.

The way companies choose to pay their employees communicates the company’s values and contributes enormously to the organisation’s culture, the type of people it attracts and the results they deliver – so it is important that a remuneration strategy be developed with the organisation’s objectives in mind.

Consider the example of a business that only pays its people a standard wage for a standard working day what is that company saying to its employees? It’s saying that nine-to- five thinking is all that’s required, and that anything outside of that should come at an extra cost to the company in the form of overtime payments. Do you think that these staff are staying back late or coming in early to get the job done? Or that they’re giving their job a moment’s thought outside of their standard workday?

What about a company that pays bonuses or commissions to individuals for monthly or quarterly results? This communicates the message that it’s everyone for him or herself, which encourages a fiercely independent and even competitive organisational culture. The frequency of bonus payments tells employees what timeframe they should be focused on, which can be a valuable tool in encouraging specific short-term results, but without the additional ability to focus people’s attention on the longer term, the message is that all they need to be focused on is the next bonus or commission timeframe. In this case you may start to see ‘sales-bulking’, which is where staff hold and rollover sales from one bonus period into the next, rather than doing more than is necessary to earn a bonus in the current period.

If a company’s incentives are based only on sales then that’s what its employees will be focused on sometimes at the expense of margin. Their focus would be quite different if rewards were based on maximising gross margin dollars, rather than just gross revenue.

And what if a company places an upper limit on the amount of bonus or commission that can be earned? Do you think its employees will continue to drive for results beyond the maximum amount that they will be rewarded for?

Why a pay packet isn’t enough

Employee remuneration is about more than just money – it is about motivation and reward, and it should comprise both economic and non-economic benefits, which will contribute toward increased levels of productivity and morale. One of the most powerful outcomes of a strategically planned remuneration system is that it helps to align your employees’ personal and financial goals with your business goals; in other words, it encourages employees to think and act like stakeholders in your business.

The ideal mix to achieve this would include base remuneration, short-term performance bonuses and long term loyalty bonuses.

Base Pay and Compulsory Employee Benefits
This must be industry-competitive. If you pay less than the rest of the market, you will attract a lower quality of employee, which will be reflected in your operating results. Compulsory employee benefits such as superannuation, annual leave, personal leave and so on can also be enhanced to help position your company as an employer of choice, as well as to help retain high-performing staff. For example, company- funded superannuation contributions could be increased after a certain number of years’ service, or additional paid annual leave offered to long-standing employees.

Discretionary Employee Benefits
These may be financial (such as employee share schemes, employer-funded health insurance or study leave) or non- financial.

Non-financial incentives are about recognising and rewarding performance, as well as demonstrating a commitment to employees by assisting them to achieve some of their lifestyle objectives.

Short-term non-financial incentives might include tickets to the theatre, a sporting event, dinner at a restaurant, a weekend away or even just a pat on the back or public acknowledgement for a job well done. They may be awarded to individuals or to teams to be enjoyed together.

Long-term non-financial incentives might include flexible working hours, the option to work from home, the provision of childcare facilities, job sharing and so on.

Performance-Based Pay
This is about rewarding people for their results and should also include both short-term and long-term incentives.

Short-term incentives are designed to influence immediate behaviour to achieve specific short-term goals. They might take the form of cash bonuses, commissions, fringe benefits or anything else that is meaningful to the employee but that does not cost the company unnecessarily in terms of margin.

Long-term incentives provide employees with a vested interest in increasing the value of the organisation. In the US and UK, long-term incentives make up between 50 and
60 per cent of an executive’s annual remuneration. There is a growing global trend toward decreasing the percentage of fixed remuneration and increasing the percentage of remuneration at risk in both the short and long term. With high performing staff, linking higher remuneration to results is a win/win for both the business and the employee – the sky is literally the limit for both. Many long-term incentive schemes include a vesting period, often up to five years, which means that the employee must remain with the company for a longer period of time before he or she can enjoy the full benefits of the scheme.

In Australia, financial incentives have been shown to improve employee performance as well as the company’s bottom line. A recent study looked at reward and incentive schemes in 663 companies (about one third of which were small businesses) and it found that companies with performance- based incentive programs gained a 134 per cent productivity return over what they paid out to employees.

Examples of Discretionary Employee Benefits

  • Generous long service leave provisions
  • Shopping vouchers
  • Family dinners, movies or holidays
  • One-off thank you gifts Office lunches Afternoons off
  • Contributions to nominated charities Birthday gift vouchers Reimbursement of study fees
  • Study leave or flexible hours for study Payment of children’s school fees Funded health insurance
  • Additional superannuation contributions
  • Flexible hours
  • Work from home
  • Dry-cleaning pick up and drop off at the office
  • Child care facilities Dependant care days Job sharing Commuting assistance Casual dress days
  • Health promotion programs Reimbursement of gym fees Club memberships
  • Personal legal, accounting and financial planning services

Successful remuneration strategies are those that attract and retain employees by rewarding high performance over both the short and long term.

Employee incentive scheme tips and traps

As much as they can offer great benefits to employers and employees alike, remuneration systems that are not properly developed or implemented can also act as a disincentive. At their most ineffective, such systems can cause a loss of trust, loss of engagement or loss of faith in the organisation. You can avoid making a mess of your system by working with expert advisers and following these simple rules.

Effective remuneration systems are:

Simple
The system must be well thought-out and easy for staff to understand so that they know how it applies to them.

Applicable
While the levels of remuneration and reward may differ, the process should apply consistently to all employees.

Employees should only benefit from a positive outcome over which they have had some input, and they should not be penalised for a negative outcome over which they have not had any influence.

Reliable
Once the system is established and has been communicated to staff, avoid making unnecessary or frequent changes to it.

Transparent
The system should be communicated in plain English and relevant information should be disclosed on a regular basis, in a format that is easily understood by all staff.

Performance indicators and measurement are a critical aspect of any incentive plan. The way staff performance will be assessed must be clearly defined and communicated so that there is no room for ambiguity or dispute. As with the system itself, the way that performance is measured will have a direct impact on the day-to-day activities and major business decisions made by participating employees, so again it is essential that the system be developed around the organisation’s objectives and desired culture. All performance indicators must be able to be measured objectively, preferably using systems and/or data, particularly where a subjective performance appraisal is a factor in determining an employee’s eligibility for a performance bonus.

Supported
Once it is launched, the system must be fully supported by the company owners and managers.

It’s not all about the money

While financial and lifestyle goals are key motivators for people, most of us are also substantially driven by intrinsic rewards: job satisfaction, the opportunity to rise up and meet new challenges, recognition for a job well done. So, while generous remuneration and employee incentive schemes are important, they’re just one component of what must be an integrated and satisfying work experience that will help your organisation to retain the best people over the long term.

  • Other important aspects of staff retention include:
  • Creating a positive and supportive work environment.
  • Recognising and catering to individual differences.
  • Matching the right people with the right jobs.
  • Using realistic and achievable goals and targets to challenge people.
  • Implementing training, programs for professional development and career advancement.