The Four Tenets of a Great Compensation Plan

October 26, 2015

Creating a compensation plan is the ultimate balancing act.

You want to pay your people well, but you have to keep an eye on the bottom line. You want to give raises that keep pace with the market and reward good work, but you don’t want to create a sense of entitlement. You want to give your employees great benefits, but you want to ensure programs make sense long-term.

So how do you do it? How do you balance the needs of the business while also attracting, retaining and motivating great people?

To find that out, we asked LinkedIn VP Head of Global Compensation Christina Hall, who previously held jobs at Intuit and Facebook. Hall said, really, the any great compensation plan has four key tenets.

They are:

1. Transparency

“You need to be transparent with your employees about how you’re paying them,” Hall said. “So they understand all the elements of the value you are delivering and they understand the timing and form at which that payout is occurring.”

Obviously, people need to know what they are paid and how they are paid, or else even the most generous compensation plan in the world is useless. Additionally, a transparent system is generally a fairer system, with less chance of abuse.

2. Simplicity

Some companies, in an effort to have a more balanced system, will have a complicated salary matrix where 10 percent of your raise is based off peer reviews, 40 percent off company performance, 17 percent off of measurable goals, etc. Soon, it becomes the law of diminishing returns, as employees began questioning the system and are unsure how to get a bigger raise.

“You have to be clear and concise,” she said. “This shouldn’t be something where you have to run a spreadsheet to know how you’re being paid.”

Instead, simpler is better. For example, bonuses based 50 percent off of an employees’ performance and 50 percent off of the company’s performance is an easy, straightforward way to pay someone, while matching their incentive to the company’s.

3. Data-Driven

One thing Hall stressed was the importance of data in building any compensation program. The more information you get, whether it be through industry surveys or even through your own recruiters, the more accurate and more effective a compensation plan you can build.

And that can mean very different salaries for different positions or even different salaries for the same position in different locations. Ultimately, the goal should be to find a pay scale that works for your company – 40th percentile of the market, 60th percentile of the market, whatever – and stick to it.

4. Scalability

“When you are hiring at the rate that LinkedIn is hiring, you have to come up with practices and strategies and processes that you have to be able to replicate on a larger scale,” Hall said. “If it becomes a culture of unadvertised specials where there can be little pockets of differentiations, that can feel like unfairness on a larger scale.”

As Hall said, a scalable compensation package is a fairer compensation package. But that doesn’t mean everyone is paid equally.

The difference? Equal pay – as in, everyone making about the same – would mean that all employees contribute the same. That’s never the case.

Fair pay means salary is tied to performance in a clear and transparent way. Paying people fairly – as in relation to how much value they bring to the company – is critical to scaling a company, because it incentives employees to fuel that growth.

“That’s all part of a pay-for-performance culture,” Hall said. “You do really want to create unbelievable rewards for people who create outstanding value for the company.”

The takeaway

When you break it down step-by-step, a great compensation program isn’t overly complicated. And that’s intentional. You want something that’s transparent and easy to understand, that’s backed by data and that is fair – but not equal – across the board.

If you start getting more complicated than that, it becomes a law of diminishing returns. Because soon, people become focused on the system in which they are being paid, instead of the work at hand.

That’s the last thing you want. Ideally, compensation plans shouldn’t be top-of-mind for your employees. Instead, the goal should be to have employees focusing on doing their job the best they can, while trusting if they do, they’ll be rewarded appropriately.

*Image from Anchorman

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