Thursday, January 22, 2015

Compensation & Benefits - Getting The Right Mix

Many employees, including Managers, often do understand the concept of total Compensation and Benefits.  Wages are not just about base salary or even bonus, incentive or commission; but rather the total weighted cost of employment, which must include benefits like vacation, sick time, pension and various other benefits.  In addition, the company is also contributing its share of Social Security and Medicare reimbursements, which can be 7.65% of salary or more depending on country.  So when all is said and done, it is the total load that matters.  Beyond regular wages, companies often pay 25% - 40% of wages, depending on family size, to support an employee.  Of course, this does not include facility and equipment expenses to pay for the space and or employee equipment usage necessary to support an employee. 

This is the reason adding headcount or Full Time Equivalents (FTE's) are so closely managed by most companies.  FTE's usually make up 65 - 70% of a company's expense line.  As a result, in our case, as the CEO of the company, I approve all new job actions, headcount and even replacements because it is such a big part of our expense line. 

In dealing with Compensation and Benefits, all aspects represent trade off's.  Most jobs involve base pay; though some are straight commission based on industry practice.  In the private sector, many exempt jobs also include various incentives, bonus or commission plans presumably to drive behaviors.  Getting it right can be complex.  It took this Blogger CEO 25 years in business to figure out that there needed to be a correlation between Sales Commission and Profit Margins.  The higher the margins achieved, the higher the commission percentage.  Otherwise, if commission percentages are fixed, there is little motivation for the sales person to achieve higher profitability for the company.  Further, bonus plans really should be predicated on pre tax profit in a way that represents profit sharing earned by achieving individual performance objectives.  Transactional incentives should drive specific behaviors to achieve the desired end result.  And, all of this must be weighed against the cost of benefits to come up with the total package. 

Getting the right mix of compensation and benefits is as much a science as it is an art.  And, this is a never ending process to some degree based on trial and error.  Each year some tweaking may be necessary to drive the right behaviors and properly reward employees for their contributions to the company.    

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