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An employee compensation plan should reward the behaviors you need to help you grow your business.

Consider compensation plans that build a business

More than just profit sharing, a plan to reward employees commensurate to their value should also build your company bigger and better.

It's possible to compensate employees in ways that motivate them beyond what a simple salary will, but it takes planning and tweaking.

The end result should be happier employees, increased revenue and lowered expenses, therefore higher profits overall, says John Felkins, director of the All Access division for an organization called EntreLeadership, a business advisory group headed by Dave Ramsey. Ramsey is the money management guru who built an international business organization, starting from his living-room-based writing and speaking business. Felkins and EntreLeadership recently hosted a webinar on employee compensation.

The webinar focused on paying for performance, but as you might expect, it also warned there are many pitfalls if such a system isn't set up right. In many cases, compensation plans end up costing business owners more than they return. The solution, Felkins says, derives from proper planning, testing and execution.

Getting started

If you are interested in compensating employees for performance, you must evaluate your company profitability beforehand, set goals for what you would like to achieve, then begin to evaluate and choose compensation plans. In that process you need to figure how these rewards can drive the desirable behaviors you want to build up your business. Last, you should determine starting steps, budget them, and then begin testing, as Felkins explains.

In the evaluation process, one question to ask is whether you have an employee retention problem. An article on veterinary clinic employee salaries and retentions from ZaneBenefits.com says one of your first steps should be to "benchmark" your employee retention rate. The author says to divide the number of employees who left during a given time period by the total number of employees at the end of that period to get the percentage. This can be quarterly, semi-annually or annually. Industry standards say 85% or higher is considered a healthy employee retention rate over time.

This is important information because there are hidden expenses in losing salaried employees. Some say those costs are equal to six or nine months of salary. Some say more.

Desired behaviors

You should also decide what you are trying to reward for each position you are considering incentivizing. A free publication called Bring Back the Sizzle from PayScale Human Capital suggests five traits that managers commonly consider worth boosting. You might choose one or more.

1.Longevity

2. Skills

3. Certifications

4. Performance

5. Proficiency

If you determine you have key employees worth the extra cost and effort to retain, or that you can grow your business with a system that rewards entrepreneurial efforts, the key to success is setting up an incentive plan or plans that take you to your goals, Felkins says. And you could have different plans for everyone in the business.

Regardless of how you may choose to incentivize behavior, good communication from "day one" will remind your team what you want and why you are paying for it, Felkin adds.

What formula?

Once you begin analysis of incentive plans, Felkins and coworker Chris Oakley suggest four common designs for compensation plans which might incentivize desired behavior.

1. Salary plus profit sharing

2. Sales commissions

3. Share of gross revenue

4. Share of net profits

Each deserves study, because each has strengths and weaknesses of which you need to be aware. Search online for ideas how these options may work.

One tip from the EntreLeadership group is you need to share enough of the profits to drive the correct behavior. A few dollars per paycheck isn't enough to "fire them up to win." If you can’t afford to share more, hold off starting a pay incentive program and find other ways to reward them.

Whatever incentives you choose should have these traits:

* Incentives should be clearly defined and stated.

* Incentives should be relatively easy to calculate.

* The compensation plan must be changeable as your company grows.

It's also worth considering market competitiveness for employees is as important as internal structural salary competitiveness. For example, if you have a large veterinary supply business as well as a clinic, your supply business manager may be worth as much or more than your salaried veterinarians.

In practice

As you're progressing through the thinking process, remember you don’t know if your plan will work until you test it. The EntreLeadership team says to run the numbers using four different business performance scenarios: conservative, expected, aggressive and revenue-based.

To convince current employees the new plans are worthwhile, you might offer it to a small group of team members or suggest it to a small percentage for a pilot program, suggests Felkins. Other ideas include:

* Start team members out with the offer to pay whichever is greater, old pay scale versus new.

* After a few weeks or months, try to get 80% and then 60% on the old plan, slowly increasing those on the new, incentive-based compensation plan.

* As the plan falls into place, communicate weekly on company goals and how employees are contributing.

At some point, if you did your planning and replanning well, you'll have that business full of people who think like entrepreneurs and work together for higher income and lower expenses. Then everybody gains.

More sources

Here are four theories in employee retention strategies with author names to help you find them for additional reading.

Positive Organizational Behavior is defined by Fred Luthans as "the study and application of positively-oriented human resource strengths and psychological capacities that can be measured, developed, and effectively managed for performance improvement in today’s workplace."

Valence, in Victor Vroom's Expectancy Theory, is the extent to which an employee's goals match the company's goals. The more aligned these are, the higher the employee retention rate.

Abraham Maslow's Hierarchy of Needs theorizes that companies should first take care of an employee's basic needs, such as job security, payment, and health benefits, and then advance to bigger aspirations, like his or her place in the company.

How important is it that employees feel they are being treated fairly? According to John Stacey Abrams' Equity Theory, if a worker feels he is getting what he considers to be fair for the job he is doing in return, he will be happy and remain in the position.

 

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