Gerald Walsh - An Atlantic Canada Leader in Executive Search, Career Transition, Executive Coaching and Human Resources

Current Thinking on Compensation

Fair compensation is fundamental to attracting and retaining key employees. I am often asked for advice on how to structure a fair compensation package and generally I suggest that organizations look at pay as having three components:

Base pay, or salary, is used to reflect the relative importance of jobs within your organization, to compete economically for talent in the marketplace, and to acknowledge performance differences among staff. Base pay levels should be matched as closely as possible to the competitive labour market, given your ability to pay, but can be adjusted from the competitive market to emphasize jobs and skills that are considered strategically important to your company.

Since base pay also serves as a platform for variable and indirect pay (see following section), which is usually expressed as a percentage of base pay, it is wise to limit base pay to what it does best. This is important because base pay increases are not only permanent but cause increases in benefit costs (ex. EI, CPP, RRSPs, etc.) that can be substantial.

Variable pay, or performance-based pay, rewards employees for performance that makes the company successful. It also means you can control payroll costs when the company is less successful because it links pay with results. Variable pay can take many forms including individual or group awards to employees for meeting or exceeding predetermined targets; bonuses that reward employees for improvements in productivity, cost savings or quality; profit sharing; and discretionary bonuses.

If you decide that performance-based pay would benefit your organization, then you must establish relevant, simple measures of performance. These measures may include profitability, financial ratios, quality improvements, productivity gains and customer satisfaction levels. They must be simple enough for all employees who participate in the plan to understand but be sufficiently accurate and appropriate to measure performance as required. It is important to remember that variable pay does not roll into base pay.

Indirect pay, or benefits, includes retirement and welfare plans (ex. health insurance, life insurance, disability, pension), pay for time not worked (ex. vacations, holidays, sick leave, personal leaves, breaks), legally required payments (ex. EI, CPP, WCB), and miscellaneous benefits (ex. child care, training allowances, car, memberships.) The current thinking in the market toward indirect pay is that the employer has an obligation to provide a basic level of employee protection for major life and health problems and to provide benefits that help employees be productive at work, such as training and development. Employees are expected to share in the responsibility for financing that protection.

However, companies are becoming less concerned about offering "better" benefits than their competitors because individuals' decisions about whether to join or leave an organization are rarely based on the level of benefits provided. Instead, your savings from indirect pay plans could be better spent on variable pay.

Gerald Walsh, CMA, is the President and Founder of Gerald Walsh Associates Inc., an executive search, career transition and executive coaching firm.

<< Articles