Dramatically Rethinking Employee Compensation Plans

Leaders and HR managers often obsess over this question: How can we design the optimal compensation plan for our employees??

Here’s the good news. This is a good challenge to obsess over. Well-designed compensation plans can indeed increase employee effort and engagement.?

Here’s the bad news. There is no “optimal compensation plan.”???

The futile quest for the optimal compensation plan?

The optimal compensation plan varies significantly by employee, depending on variables ranging from their age and risk aversion to their career ambitions and personal priorities. The concept of the optimal compensation plan never made perfect sense simply because people are different. That said, it made more sense at a time when society was more homogenous, with limited variance across what people valued in their professional and personal lives and when departures from the happy middle were rare and frowned upon.??

In those times, the optimal compensation plan was mainly focused on getting three things right: the base salary, sometimes a performance-based compensation component, and sometimes fringe benefits such as those related to retirement and health insurance. Experienced managers were typically rewarded with a higher base salary. Interestingly, the ease with which the HR function could monitor and implement the compensation plan was a key input into its design. As a result, compensation plans at a given level of the hierarchy were largely standardized. Such standardization was also seen as a signal of fairness.?

Today, that approach to compensation design does not work for three reasons:?

First, with mobile global populations and shifting social mores, employees with different demographic, national, ethnic, racial backgrounds, and identities are increasingly mingling in the workplace. For example, modern societies exhibit greater age variations across employees than societies of the past. Of course, throughout history, people of different ages were present in every society. But, today, people are living and working longer than ever. This leads to many overlapping generations at work, each with its own traits and preferences. Compensation plans must accommodate the fact that different people want different things from their workplace.?

Second, people now want more out of their lives. In staider times, employees sought a “job” that primarily offered them the opportunity for a stable living with some opportunities for advancement. Those expectations have evolved. For example, many employees from Generations Y, Z, and Alpha value time off to do their own thing as much as they do monetary compensation at work. They also value—and even expect—continuous learning on the job. Compensation plans must cater to these preferences.?

Third, the war for talent is now intense. Platforms like LinkedIn have made job-hunting more efficient. The notion of lifelong employment is increasingly irrelevant. Employees don’t want to work for the same company throughout their lives. They are more mobile and flexible with respect to their careers. In this new reality, compensation plans must play a key role in attracting and retaining high quality talent.?

How to design effective compensation plans for the modern workforce?

As discussed, employees want different things from their compensation plans. But companies can find it close to impossible to design a customized compensation plan for each employee. The costs of doing so are high, and companies can get the compensation plans wrong despite their honest efforts.??

But there is a creative way to address this challenge—allow employees to design their own compensation plans. The image that comes to mind is that of employees conjuring up “I’ll take everything I can” compensation plans. In reality, the process of self-designing compensation plans would work quite differently.?

Most companies have a budget for compensating a specific employee who they bring on board. Companies should allow employees to choose the components that comprise the compensation plan subject to that overall budget constraint. For example, an employee could choose more time away from work and balance that with a lower salary. Likewise, an employee could choose to be rewarded with external learning opportunities—rather than a raise—for excellent performance.???

Companies should provide a rich range of components from which employees could construct their ideal compensation plan. The components could include the following:?

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Technology can help employees design their optimal compensation plan. For example, AI-based platforms can tweak the available range on each compensation element even as employees choose levels of other compensation elements. Learning from the choices of other employees such platforms could even suggest levels of some components. In every case, the platforms would ensure that the total compensation package falls within the allocated budget.??

Few employees are ever fully satisfied with their compensation plan. A key advantage of a self-designed compensation plan is that it reflects the employee’s choices. Therefore, they have less to complain about and more to be happy about.?

How SLK Catalyst Partners can help?

We can assist by:??

1. Auditing your existing compensation plan—what is working and what is not.?

1. Structure the components of a self-customized compensation plan based on your company, business domain, and industry characteristics.?

1. If required, work with you to build and launch a compensation configuration platform that will allow employees to structure their own compensation plans while adhering to the budget allocations.?

For more information on how SLK Catalyst Partners can help, visit SLK Catalyst Partners.?