SME Toolkit Logo
Partner Logo
Home  > Three Questions for a Fair Compensation Strategy
 Share  Print Version  Email

Three Questions for a Fair Compensation Strategy

Provided by the International Finance Corporation


Fair compensation is critical for your employees’ productivity and retention. According to Wiley (2011), 25 percent of employees say fair compensa­tion is the single most important thing they want from their organization. In addition, Rasch and Szypko from the employee research institute Kenexa High Performance Institute (2013) highlight that employees who believe they are fairly paid are more engaged, are less likely to quit, experience less stress at work, feel healthier physically and psychologically, and are more satisfied with their personal lives.

Emotions, perceptions and feelings are often mixed when the compensation topic is being discussed. Ask yourself the three below questions as you update your compensation strategy to make the most of it and mitigate potential issues:

WHAT is a ‘fair’ compensation?

Compensation covers everything provided in exchange for working, i.e. the remuneration or amount per hour or per year that you are paid for performing the job in addition to performance bonuses; benefits such as health, vision and dental insurance and retirement plans; and perks and potential on-site amenities such as child care, etc.

What you can offer in compensation often depends of the legal set-up of your company,  the stage of maturity of your business, its size, the sector you are in, and level of turnover and profit, and what the market dictates. 

As you do so, keep in mind the following three drivers flagged by Rasch and Szypko for employees to have faith in the fairness of his/her pay (and of yours!):

  • Understanding how pay is determined (who determine it; care and rigor to anchor base, median and maximum scale with what the market offers; expected variance with industry, organization size and level of maturity and external economic conditions;)
  • Knowing how to maximize pay (fix, variable)
  • Believing pay is related to performance (including knowing the difference between pay for performance and increase for performance)

Bridging gaps at the managers and employees’ level through transparency and a clear, consistent and coherent communication with training, tools, guidelines, represent significant opportunities for your business for increased employee engagement. With increased access to information online about your competitors and benchmarked companies, do this the sooner than the latter, before your top employees decide to venture into new horizons!

WHEN do you need to adapt your strategy?

In a start-up phase, make sure you plan cash flow strategies in your business plan. After you have bought your equipment, built products, stocked inventory, marketed your services to attract customers, paid legal and accounting costs, and your rent and utility deposits, check how much cash you still have at hands for your compensations.

As your business grows, balance priorities: ensure that your compensation strategy enables you to attract and retain the talents you need while reinvesting part of your profits to support this growth. In addition, if, as the business owner, you own stock or shares in your company, you may consider taking a reasonable salary and pay the remaining amount out of dividend payments.

If your business is going through a difficult financial situation, make sure your employees payroll and other fixed costs are covered first, and seek professional advice as you revisit your own and top managers’ compensations.

HOW will you pay your employees?

Pay out of your profits – not your revenue. Money generated by your business does not mean that you can redistribute a large part of it. Take into account first expenses like taxes, fixed costs and overhead before you estimate payroll and dividends. Whatever the financial situation of your business, make sure that you prepare up-to-date cash-flow statement and forecast to reflect the situation of your business and understand what you can afford. It is always wise to consult your accountant to help you determine what best strategies apply to your business financial situation. 

Find more resources:

For more information about studies referenced to in the article:

Copyright © 2000 - 2017, International Finance Corporation. All Rights Reserved.

© International Finance Corporation [Year of First Publication].  All rights reserved.
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
Internet:  www.ifc.org
 
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

 Share  Print Version  Email