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Linking Pay to Company Performance

Astronomical stock market prices, eye-popping executive compensation packages, and record earnings for many organizations are making the front page of newspapers across the nation. Little wonder that employees in financially sound organizations are asking why their pay increases are not mirroring the financial performance of the company. Whether you are responsible for compensation in a sole proprietorship, partnership, or publicly traded company, these questions can be difficult and uncomfortable to address. Here are some ideas that may help you manage employee expectations given these unprecedented earnings.

Some employees compare themselves to the shareholders or business owners. If the earnings are increased by 20% per year, and they think they are the ones doing the work, they wonder why they shouldn't get increased earnings as well? The missing element here that employees often don't consider is that shareholders are willing to accept risk. In any given year, the earnings could increase or decrease and shareholders are willing to share in the good times and the bad. Employees may say they are willing to share risk but, as many of us have learned the hard way, pay cuts are very hard to stomach no matter the reason.

We do not recommend tying base salaries to organization performance. Organizations must maintain a competitive level of base pay and a few years of high earnings could shift that pay up significantly. If base salaries are increased beyond the market rate, the organization has operating expenses beyond what their competitors have and the organization could jeopardize its ability to respond to down market cycles. Employee base salary should be aligned with market rates for similar jobs and not corporate financial earnings. That is not to say that employees shouldn't participate in the organizational success. They most definitely should. If your organization is like many with record profits, and yet merit increase levels are in the 3% to 4% range, consider some variable pay alternatives to allow employees to share in the company's success. Gainsharing, profit sharing, stock options, incentive plans or organizational funded 401(k) plans are alternatives which allow employees to share in company success without eroding the integrity of the base pay plan and jeopardizing employees' standard of living in future years.

It is always a good idea to pay people for their contributions to organizational results. In this period of substantial company financial progress, it is even more important. Failure to do so risks low morale, key employee turnover, and even more difficulty in attracting qualified new hires.


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