Salaries and bonuses
A few key principles must be kept in mind in building the pay and bonus system:
- Base pay should enable the employee to satisfy their essential living needs. If it is too low, the employee will be looking for a new, better-paid job from their first day with the company, or will work extra after hours and their effectiveness will be low.
- Base pay must fall within a market range. If it is too high, it will generate excessive costs, the company will cease to be competitive and profitability will decline.
- Base pay is not given for nothing, nor is it a rate for just coming to work. For base pay, the employer should expect a solid daily work input. Employees must often be made aware of this truth.
- Do not build excessively rigid and complicated pay scales, as they will be incomprehensible and illegible to employees, and system management will be too expensive.
- Make sure there are no excessive disparities in base pay between rank-and-file personnel and managers or directors. Gross disparities (by an order of magnitude) do not motivate managers or directors, but they do demotivate the personnel.
Different schemes and resulting bonus systems are known. In most cases, they are too complicated and fail to fall in line with the main goal of doing business, i.e. making profit.
A handful of principles:
- The simplest systems work the best. Those where the employee can calculate the bonus amount for themselves.
- The system should be based on profitability performance.
- The bonus system should cover as many personnel as possible. Preferably all of them.
- A part of profit should be allocated in advance for bonuses. This means that no profit equals no bonus.
- The system should apply without changes over the accounting period.
- Do not apply upper limits, and if you do, make them high because employees will start to “decelerate” when approaching the limit.
- The key to proper operation of the system is a correct allocation of targets. They should be ambitious and neither too low (failing to motivate people to work efficiently) nor too high (have a demotivating effect).
It is obvious and natural that every employee wants to earn as much as possible, and will often come to their superior with such a request. The answer to a request like this is simple. First, by delivering on targets, you can earn more. Second, ask the employee to calculate their individual profit and loss account, i.e. how much they contribute to the company and how much they cost, taking into account all costs (pay, office, company phone, company car, etc.). The difference should be positive and in line with budgeted ratios. This usually ends the discussion.
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