As CFO’s we are often involved in the compensation discussion when it comes to new hires or adding staff, managers or executives to a company.
The discussion on pay generally revolves around setting a range based on industry, desired skills and what is currently being paid for similar positions within the company.
Hourly is the customary approach to lower-level positions and salary for managers and executives, which is the way most owners think about compensation because it’s simple and straight forward. Sometimes there is an annual bonus based on achieving some level of performance but often this is based on some subjective criteria. And often times the person tasked with achieving the performance does not have control or authority over what is being measured.
While most think only hourly or salary, a good CFO views a compensation plan as a tool to motivate and reward behavior that is aligned with achieving company goals.
Start with the end in mind. If the market rate is $15 per hour for a warehouse person consider $12 as an hourly base, plus an activity based plan that allows them to earn incentives of $3 more per hour.
Here are some suggestions based on a few hourly positions:
- Warehouse labor – hourly + additional $ amount for every order shipped that day.
- Customer Service Rep – hourly + additional $ amount for every order entered.
- Repair technician - hourly + additional $ per customer billed hour.
When it comes to manager and executive compensation it becomes more difficult since there are many more external and internal forces not in a person’s direct control.
Some of these difficulties can be overcome by designing a plan that only includes activities and costs under their direct control. An example would be a plant manager being compensated on a plant’s profits that does not include costs for insurance, accounting or owners salary.
When considering executive plans, sometimes the CEO, CFO and VP collectively share a bonus or pool of profits based upon meeting or exceeding certain financial goals.
We recently designed an executive bonus plan that was based on 4 factors, 1) exceeding last year’s revenues by 30%; 2) maintaining a bottom line net income percentage of 12%; 3) keeping A/R less than 45 days; and 4) inventory turns greater than 8 times. Under this plan to earn a bonus the executive has to grow revenues and control costs while managing working capital and cash flow.
Compensation plans …. Hourly or salary are not your only options!
Here are some key points to consider when designing a plan:
- Make is simple to understand
- It should be easy to measure against the activity accomplished
- Make is fair and obtainable
- Limit management subjectivity
- Try to contain the number of controllable variables to the people achieving the goal.
- Measure it as you go along, don’t design an annual plan that you can’t calculate along the way
- Focus on driving results that achieve company goals
Hourly and salary don’t have to be the only compensation options. A well-designed plan is a great motivator for employees and a powerful way for a company to achieve goals while driving their vision and mission.
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