With U.S. job openings at record highs and a widespread labor shortage, companies across the country are struggling to fill open positions. Today’s talent demands –– and deserves –– more than a salary. Building a comprehensive Compensation and Total Rewards plan is one of the best assurances companies have of attracting and retaining top talent.

According to the 2021 North America Talent Attraction and Retention Survey from Willis Towers Watson, most executives agree that compensation is extremely important for talent attraction and retention. The challenge is understanding what individuals want and need. Everyone is different, so how do you create an equitable system that also drives employee performance among various jobs and skill levels?

There are a multitude of options to consider in building a compensation package, including base pay; variable pay plans; benefit plans; company culture advantages; perks like free parking, free gym memberships, and on-site day care; employee training and development; paid time-off programs; tuition reimbursement; recognition programs; and discretionary contributions to retirement accounts or other discretionary bonuses.

The laundry list of considerations can be daunting for business owners and other busy executives, so it’s easy for them to rely on bonuses as a catch-all solution. However, as the following example shows, it is best not to fall into this trap. 

True story: a financially stable employer regularly rewarded a large portion of company profits to their employees as an annual cash bonus. No individual performance factors were defined as a part of the program beyond the overall profitably of the company. Obviously, employees loved the bi-annual reward and expressed pride in being part of a company generous in sharing its profits with them. 

By design, employee base salaries were very low compared to the market but when adding in this annual bonus, their overall cash compensation was slightly above market. As such, employees became highly dependent upon the bonus. The low base pay created significant recruitment challenges when hiring for talent, even though overall cash compensation was better than competitive.

The employees had no tie to the pay-for-performance nature of the bonus given the company had never experienced a down year nor did they have personal achievements tied to the bonus plan that dictated payout amounts. That was until the Covid-19 pandemic hit and company profits plunged. Nearly half of employees were downsized and no bonuses were issued in 2020. Top executives took pay cuts. Many of the remaining employees considered leaving the company due to the lack of competitive pay. The bonus the company was no longer able to afford was viewed by employees as a promise they were “owed” rather than it being a reward.

Unless bonuses are designed with thoughtful alignment to the company’s strategic plan, they can confuse employees or worse, produce a culture of entitlement. HR Experts on Demand was able to work with the employer to develop a healthier compensation and rewards system that included: 

  • A Competitive Base Pay Plan compared to local and industry base compensation. The previously small base pay was significant to employees.  The average employee age was 31 and many younger employees struggled from paycheck to paycheck. Additionally, the only way to get a “raise” was to get promoted since no merit reviews were conducted annually. This resulted in unnecessary promotions and an over-inflated organizational structure of “middle managers” who didn’t manage anyone.
  • A Pay-for-Performance based Variable Pay Program to replace the profit-share payout. The collective culture, although appreciative of the bonus, didn’t see it as profit share. It was “expected” pay in employees’ eyes. The risk of the payout was too high to safely retain staff, especially key players. Recruitment was challenging. HR had to be in “hard sell” mode to convince new, mostly young hires to come aboard with such low base pay. 

Today, the company’s compensation structure has salary ranges that include levels of proficiency and a career path for financial growth managed through annual review periods that consider merit and promotional increases. The leadership team also established a target payout percentage of annual profits for employees to have eligibility to earn bonuses.  Earning a bonus is dependent upon achieving goals and overall performance.  Managers are learning how to discern performance between employees and manage a budgeted payout within their group. Further, the company committed to a rigorous Talent Management Summit where all leaders share their employee ratings with each other and discuss bonus rewards.  This process allows for calibration between managers on ratings and provides more consistency within the compensation system internally.

  • A Performance Appraisal System with rankings to link pay with performance. This was the hardest step of all. While the system implementation itself was easy, using the system effectively required managers to learn how to incorporate goal setting through a disciplined methodology of giving valuable and meaningful feedback. This was a complete sea change from the past where managers weren’t required to document performance and achievement of employees.  Many had no people management or leadership skills despite their “title” of leader. 

Contact HR Experts on Demand today if you are struggling to attract and retain the talent you need or wonder if your compensation strategy is driving employee performance. Our comprehensive assessment will likely uncover the solution.