How to demystify salary and incentives
Compensation is the most important connection between an employee and an organization. Think about it: People take jobs to earn money. In fact, an employee — as defined by Merriam-Webster — is someone who is “hired by another to perform a service, especially for wages or salary.”
So given the importance of an employee’s salary and incentives, why do so many organizations under-communicate about it?
Compensation is complicated. In most organizations, compensation varies from person to person, depending on his or her job level and performance. An employee at every level — executive, manager, individual contributor — either exceeds, meets or falls below his or her performance expectations, and thus, each is paid differently. All of the combinations can be confusing.
Considering all the variables, it’s difficult to create communication that helps employees understand their compensation program and potential to maximize earnings.
Compensation is confidential, too. In most cases, an employee’s annual earnings are not disclosed to other employees. As a result, organizations often shy away from compensation communication even more. Many opt to lean more heavily on one-on-one conversations between the manager and employee to provide critical information about an employee’s pay.
But conversations are not enough. Employees need more.
In fact, only 25 percent of employees (that’s one of every four!) feel they have the information they need to understand their pay.
To help employees make the most of their earning potential, they require compensation communication that is:
· Relevant to their role and level
· Clear enough to understand without a translator
· Organized so it’s easy to follow
So how can you create communication that meets employees’ needs?
First, decide on your communication strategy: What vehicles do you want to create? A one-page reference sheet? A detailed online or print guide? A microsite? Maybe an app or online learning modules? No matter what combination of vehicles you choose, here are four tips to create useful compensation communication.
1. Make compensation communication relevant.
Identify each job level and role for which a different compensation structure applies.
Many organizations communicate broadly about job levels and the salary ranges for each level. But incentive structures often vary from an executive to a sales manager to a call center representative.
Be sure you create separate communication for each specific target audience.
2. Understand and define all of the program variables.
Once you know the different employee groups that need separate compensation communication, it’s time to learn the components of each plan.
How does each group measure success? How are employees rewarded?
For example, one organization may measure its sales employees based on individual percentage of target earnings, team percentage of target earnings and the team’s earned market share.
Another organization may measure the success of call center managers based on the volume of calls handled, number of customers retained and a department average of time customers spend on hold waiting to speak to a representative.
In both cases, employees may be rewarded with monetary bonuses or equity awards, such as restricted stocks or stock options.
Once you understand the variables, you’ll have the foundation to make your compensation communication meaningful. Consider using a bulleted list, callout or sidebar to clearly define program components and key terms used to calculate compensation.
3. Learn the math and show your work.
Now that you understand the components and key terms of each compensation program, you absolutely must learn how the math works. Don’t try to avoid it — it’ll only get more painful.
But don’t worry: Most compensation geeks are happy to grab a scrap of paper or a section of white board to show you how it works. Pay attention, take notes (or pictures) and ask lots of questions!
Collaborate with your compensation experts so you know how to:
· Provide step-by-step guidance on each part of the program, using plain language and terms you’ve already defined.
· Illustrate the equations to show how the calculations work.
· Develop charts and grids to demonstrate how various program elements work together.
4. Create characters to bring scenarios to life.
Developing compensation communication, particularly incentive compensation, is challenging because it’s hypothetical. A combination of variables will ultimately determine the result — the total amount of compensation an employee receives.
To help employees understand their earning potential, develop scenarios of possible outcomes. Then create characters — fictitious colleagues — to whom employees can relate. Here are three easy scenarios to get you started:
1. Develop one best-case-scenario character — let’s call her Cameron — who exceeds all of her targets.
2. Develop another character — Henry — who meets all of his targets.
3. And don’t forget Emily, who has had a less-than-stellar year, coming in just under target.
Be sure to include assumptions about each character, including his or her role and how he or she works and meets goals. Here’s an example:
Meet Cameron, a sales representative (from a pharmaceutical company).
· Cameron exceeded her sales goal with 104% attainment.
· Cameron exceeded her “new patient event” individual goal and reached 125% attainment.
· Cameron’s team achieved its “new patient event” goal for 100% attainment.
Then using equations, charts and/or tables, show how Cameron’s achievements equate to monetary compensation or other types of awards.
Bringing it all together
To communicate about compensation so employees understand how it works, you need to first break down the plan’s structure. Then, build it back up using plain language, visuals and scenario examples. Only when you master the content — that is, understand each component and calculation — will you be able to help employees maximize their earnings potential.