How Employee Compensation Works

Forms of Compensation

Your bonuses should be based on achievement, and should include all of your employees. Don't limit your incentive program to certain employees, or you'll limit your company's potential. You'll also lose the benefit of the team-building effects of incentive-based compensation. If everyone is going after the same goal, they'll have a better chance -- and your company will have a better chance -- of succeeding.

Your rewards should also be based on results and not simply the activity level of the employee. Just because they try doesn't mean they should get the bonus that those who actually produce results get.

Don't put a limit on the amount of the bonus; you'll only limit the effort your employees put into the job. Once they reach the limit, they'll feel they can kick back and relax. Keep it open and they'll continue to produce.

Tying your employees' compensation to the results they produce will help them focus on the company's bottom line. You can also tie in long-term incentive compensation in the form of stock options and deferred compensation plans (more about stock options later in this article). These types of plans not only compensate your employees for good work, but also help retain them.

For your sales staff, an incentive-based pay structure will almost always produce better results than a straight pay structure. Although your customers may experience a less-pressured sales pitch from a salaried sales rep, they probably won't purchase as much, either. Putting in place a commission-based pay structure for your sales staff can directly affect your sales numbers. If their income is directly related to their performance and no ceiling is placed in their way, then the sky really can be the limit. If you have talented sales staff, they will thrive in this type of environment; if you don't, then they usually won't. You can easily detect who is producing and who isn't and weed out accordingly -- or at least know who requires some additional sales training.

There are also disadvantages to commission-based pay structures for sales staff. Often, employees focus entirely on the sale of items that give them the highest return for their time and don't really take into consideration the actual needs of the client. Customer service may also suffer because the sales rep has moved on to the next high-dollar sale. What you have to do is make sure you have a good combination of both a base salary and sales commission. Your base salary has to be sufficient to attract good candidates, but not so good that you'll get reps satisfied with the base amount even if they don't make any sales!

It's a delicate balance. Your type of business will also play a part in determining the type of pay structure you offer your sales staff. If you offer a single product with few variations, then a straight commission structure may work for you. If you offer several products or services or a combination of products and services, then your sales approach is going to require more of a relationship-building technique and probably more continued customer service if you want to make additional sales to your existing customer base. In this case, your base salary may be more important. Also keep in mind that this pay structure can evolve over time. If something isn't working, then you can adjust it. Just make sure your staff understands that when you hire them.

In addition to regular benefits packages that include health insurance, vacation, and retirement plans, employees seem to be actively seeking companies who offer more of the things they value. Balancing their lives is becoming more important than ever. Because of this, other benefits like flexible schedules, relaxed atmospheres, childcare and other lifestyle benefits are becoming almost as important as salaries. In fact, according to data compiled by WorkLife Benefits, 90% of 1,000+ employees polled by the Gallup Organization in 1998 said that work/life balance is as important as health insurance. More than one-fourth of surveyed workers said that balancing work and family is more important than a competitive salary, job security or support for an advanced degree. But these other perks, as well as other intrinsic rewards, can definitely have a strong effect on how employees feel about their employer and their work environment, and can help retain employees who might otherwise leave. We'll talk more about fringe and other added benefits throughout this article.

If you're a small employer and doing your own payroll, you'll also need to stay on top of changes in employment taxes. As of January 2001, Social Security tax was 6.2% and Medicare tax was 1.45%. Each requires you, as the employer, to match the amounts withheld for a total of 15.3% to be paid to the IRS. You must also pay unemployment taxes if your employees earned at least $1500 in one calendar quarter. Visit the U.S. Treasury Web site for up-to-date information about income-tax withholding, Social Security and Medicare withholding, as well as rules about when and how you should be depositing these taxes (more on this later in the article).

If you have hired independent contractors, you are not required to withhold taxes or match amounts. You do, however, have to be certain that the worker would be classified as an independent contractor. As a rule of thumb, whether workers are contractors or not is determined by who controls their time and how and where they do the job. Again, visit the U.S. Treasury Web site for up-to-date information.

Each individual state also has withholding requirements. A Website like this Tax and Accounting Site Directory can provide you with links to an individual state's treasury office, which will provide up-to-date information regarding unemployment insurance, income-tax withholding, and any additional taxes that might be required.

Now, let's move on and talk about the "I" word: Insurance.