Compensation and Rewards

Many people are motivated by money—at least for a period of time. But the motivational power of money often wears off as employees simply get used to their current level of compensation. Many studies have confirmed that as long as employees are paid competitively, money is not the main factor that leads to job selection or performance.

Ultimately, most people are motivated more by the work they do and the environment in which they work than by the money they earn. Therefore, the compensation and rewards system you offer to employees should include both monetary and non-monetary ideas.

Utilizing Monetary Compensation

Growing businesses that struggle with cash flow issues and “making payroll,” will want to think creatively about how to provide monetary compensation and rewards to their management and staff. When Ewing Kauffman managed Marion Laboratories, he paid his managers, directors, and officers salaries slightly below what competitors were offering, but offered profit-sharing, paid generous bonuses for high performance, and added benefits when the company did well.

Similar techniques are available to you in terms of end-of-year, team-performance, and individual bonuses, profit-sharing, stock options, phantom stock, and stock warrants. All of these plans can have their pitfalls, and all must be tailored to your particular situation. Seek expert assistance from a compensation specialist and a lawyer and keep your plan aligned with your company’s values.

Remember, when establishing your compensation and reward policies, employees should be compensated for the work they do at or near competitive salary levels. Also, monetary compensation above and beyond competitive levels may not be motivating if the recipients really value other things, like time with their family.

Growing companies that cannot afford to pay the same salaries as an established corporation may offer their key employees a form of ownership in the company. That way, if the company is successful, the employees will share in the success.

Be careful to avoid these pitfalls:

  • Diluting your controlling interest in the venture
  • Rewarding some people while alienating others who are also productive
  • Prompting the wrong behaviors or the wrong values
  • Diminishing a sense of camaraderie and teamwork
  • Increasing your tax burden
  • Bickering over accounting practices for stating profits
  • A one-compensation-plan-fits-all mentality
  • Enabling disgruntled ex-employees to own significant stock

Compensation systems create consequences—whether they are intended or not. You must make a careful decision about how you are going to pay your employees. Even if you pay straight salary or hourly wages you’ve still got a monetary compensation system. The right compensation system can go a long way to building the kind of company you desire.

Providing Rewards

Effective reward systems include all forms of monetary compensation plus a wide variety of other motivators that are important to people in a work setting. You will be surprised at the benefits your company will reap when you reward good performance with job assignments, recognition, growth and learning, additional responsibility, trust, authority, and autonomy.

The effectiveness of any reward system requires two primary factors. First, the recipient must perceive the reward as a positive event, and second, the reward needs to encourage the desired behavior. The desired behavior must be consistent with the strategic goals of the company. It is your responsibility as the entrepreneur to make sure the reward system is set up to support the right behaviors.

To make this two-part principle work for you, you’re going to have to understand rewards from the perspective of your workers, which requires you to spend time with your team and learn what’s important to them. Monitor the results of your rewards to see if they’re really having the effect you want them to have. Remember, what you perceive as rewarding may not be rewarding to your employees. For example, many companies reward salespeople for their efforts by basing some or all of their compensation on a percentage of the dollar amount of sales revenues. This approach is a proven winner in most cases, but some companies—notably those who want to have their salespeople act as consultants to their customers—have found that poorly conceived commissions can push salespeople away from their role as consultants, making it less likely that the client will turn to the salesperson in the future or that big-ticket projects will be developed.

Instead of relying solely on monetary rewards, try some of the following approaches to increase motivation and productivity:

Say thank you—Acknowledge people for their good efforts and superior results. You may be surprised what sincere acknowledgements will do. Consider both public and private acknowledgements but keep your employees’ preferences in mind.

Share the big picture—Employees work smarter and enjoy their work more when they know how their job fits into the company’s success. Many companies have found success by sharing their financial performance with employees and showing them how they can help improve it.

Treat people fairly—The world isn’t fair, but most people hope it will be. Treating people fairly means treating everyone with respect, rewarding successful performance, and critiquing unsuccessful performance.

Create a learning attitude—You will make mistakes as you lead your organization, but that’s okay as long as you learn from them. Your team members are going to make mistakes too. Be a role model by discussing your mistakes. In fact, make the discussion of mistakes a regular part of your meetings. The point is not to focus on mistakes but on the lessons learned for future applications.

Consider the following three questions to help you learn from a mistake:

  • What did we do right?
  • What did we do wrong?
  • What can we improve next time?

Using these questions at every staff meeting and at the end of every project will help create an organizational culture comfortable with the truth, ready to acknowledge success, and open to learning and improvement.

Celebrate successes—When the company wins a big contract, finishes a large project, or reaches an important milestone, bring everyone together to celebrate. When individuals or teams do well or reach milestones, acknowledge their results as well. People want to feel part of a successful company.

Increase responsibilities—When people perform well, provide them with opportunities for advancement, increase their responsibilities, allow them more freedom to make decisions, or give them larger portions of the budget to control. Beware not to punish people by overloading them with too much work and don’t assume that everyone will find new challenges rewarding.

Trust and ask for input—When you show others that you trust them, they begin to do things on their own initiative. They create energy for your organization. If you look over their shoulders constantly, you’ll get employees who will only do what they are told.

Showing trust means asking for help in making important company decisions. When a major Detroit car manufacturer changed its management approach, one of the workers said, “I’ve been working for this company for twenty-seven years, and before the recent changes, not once in that time did anyone ask me what I thought should be done. For the first time they are now receiving the benefits of my head, not just my hands.”

Avoid micromanaging—Avoid the tendency to be consistently involved in every decision and every task. Remember that any given outcome can be achieved a number of ways. Encourage your associates to experiment by trying different ways to improve a task or solve a problem. Don’t micromanage! Agree on the goals and let the employees figure out how to meet those goals.

Rather than spending great energy trying to prove that an employee is wrong and the boss is right, successful entrepreneurs say, “That way is not working; we should try something else.” Establishing an experimental, learning attitude can turn early failures into success. An enthusiastic, “We are making this up as we go along” attitude can keep people looking for ways to improve the way they get things done.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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