There once was a business owner who thought that she had a great compensation program. Salaries were on the low side of average, but end-of-the-year profit sharing typically increased individual pay by nearly 20%. The higher the net, the larger the annual profit-sharing checks, which for some exceeded $10,000. This plan kept overhead salaries low while keeping everyone's eye on the prize of net profit. The goals of the program were logical and understandable. But when she lost a highly valued team member, she found out it wasn't working.

Turns out her employees wanted the security of a steady and competitive salary. They were not interested in, nor did they value, the profit-sharing distribution even though that system had the potential of delivering much more to the employee's bottom line. Though they were excellent employees, they didn't thrive on the risk and reward of entrepreneurship. They also wanted a defined system for how they would receive raises in the future. This was a wake-up call to the owner.

She could see that the current compensation system worked against another company goal: building longevity in the team. After researching other organizations' compensation processes, she decided to:

  • Raise salaries to a more competitive level.
  • Create a set of measurable expectations for every position. This would include tasks specific to the position as well as how the employee modeled the company's core values. Because they were measurable, this greatly reduced subjectivity by the owner, which took away much of the owner's stress during performance reviews.
  • Set up guidelines for how raises would be awarded so that everyone would understand how their ability to meet the expectations affected their income: expectations not met — no raise; expectations met — 3% raise; expectations exceeded — 5% raise.

    • Because the owner still felt that the employees should share in the company's success to some degree, she created a bonus program. Total bonus available: 10% of the individual employee's salary. Again, this was put in the budget, not taken from net profit.

  • 60% of the total available bonus would be based on individual performance and rewarded at the owner's discretion.
  • 40% of the total available would be based on the company's net profit — keeping everyone focused on the bottom line.

    • By formalizing this process the owner showed her employees that she was listening. It also removed the perception that they would never be paid what they were worth, and so eliminated the idea that this was only a stopping-off point and not a place they could call home.

    Although the company is now paying the employees a total that is less than they were paid under the old compensation system, the new system answers the needs of the employees, which will, the owner hopes, drive up retention — a major key to success for any small business. — Victoria Downing is president of Remodelers Advantage, a national consulting firm specializing in the challenges of running a remodeling company, and home of Remodelers Advantage Roundtables. 301.490.5620; www.remodelersadvantage.com.