Developing a Company Compensation Strategy

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As I travel the U.S. and Canada doing consulting work and facilitating workshops, the two questions I hear most often are “What’s a really good compensation program for kitchen and bath sales/design people?” and “How do you develop a compensation program that’s fair and equitable for both the employees and the company?” These are great questions – and I’m not sure there’s one pat answer to either.

I know what worked very well for my business and I have introduced these philosophies and strategies to a number of my consulting clients.

I also devoted 14 pages to the topic of compensation in my new book, “Kitchen and Bath Business Management” published by the NKBA. Following are some thoughts and ideas from the book.

Compensation packages for employees are major drivers for your business. If your company is like most kitchen and bath firms, this may well be your firm’s number one expense category.

For the average small business in America, total people costs (wages, taxes, insurance and benefits) are between 50%-60% of total operating expenses. According to the last Dealer Profit Report that NKBA did for its dealers, total payroll expenses were 56.4% of the total operating expenses (right in line with the national small business averages). Are your people costs in that 50%-60% range?

Payroll is more than simply an “expense.” How much you pay your employees and the factors that you use to establish pay scales, award bonuses and other incentives can profoundly affect the quality of your work force. And, equally important, it can affect your ability to attract and retain productive, reliable employees.

The basic language of employee compensation can get confusing. Following are a few terms you should be familiar with as they relate to compensation:

  • Compensation – This term is used to define all of the “rewards” that employees receive in exchange for their work – including base pay, commissions, bonuses, benefits, spiffs and other incentives.
  • Base Wage and Salary – This is the salary or wage that employees receive before deductions and other incentives.
  • Incentives – These are special “rewards” such as commissions, incentives, bonuses, spiffs, profit sharing, etc. that you offer employees in addition to base wage or salary.
  • Benefits – Benefits are all special rewards that you offer to employees in addition to base wages or salary. Examples would include health insurance, stock options, 401(K) retirement plans, vacation, sick days, etc.
  • Exempt Workers – Employees who receive salaries (those paid on a flat weekly, bi-weekly or monthly basis as opposed to an hourly basis) and who are ineligible in most cases for overtime pay.
  • Non-Exempt Workers – These are full-time and part-time workers to whom you pay an hourly wage. The provision of the Fair Labor Standards Act (FLSA) and comparable state/provincial laws, particularly in respect to minimum hourly wage and overtime pay, covers non-exempt employees. Be sure to check your state/province on the criteria that constitutes and clarifies the difference between exempt and non-exempt employees. It varies from state to state and province to province.
  • Commission – This is a percentage of the selling price or gross profit margin earned on the sale of products and/or services. A commission can be the total wage or can be combined with salary or hourly wages.
Setting the Foundation

To set the foundation for an effective compensation program, first – think system. Then, think strategy – with a constant eye toward the needs and goals of your business. An effective compensation system is a well-thought-out set of practices that helps to ensure these results:

  • Your employees receive a fair and equitable wage (from both the owner’s and the employee’s perspective) for the work they perform.
  • Your payroll costs are in line with the overall financial health of your business.
  • Your employees clearly understand your basic philosophy of compensation, and you have the strong support of managers and employees.
  • The pay scale for the various jobs in the company reflects the relative importance of the job and the skills that performing these jobs requires.
  • Pay scales are competitive enough with others in your region so that you are able to retain and attract employees. Your compensation policies (and levels) are in line with state/province and federal laws involving minimum wage and job classification.
  • Your compensation policies keep pace with the changing nature of today’s labor market – particularly in recruiting and retaining the “knowledge workers” who are in strong demand.

Compensation Philosophy

Do you try to just meet the minimum compensation it will take to bring a new employee on board, and then react to wage increases as employees put the heat on? Or, do you have a well-thought-out strategy that becomes the basis for your wage and salary decisions?

Some of the questions you may want to ask yourself if you want to develop an acceptable compensation strategy might be:

  • Will you make your pay scales simply competitive with the going rate in your area, or will you try to pay just a little more? When you compensate the best, you can also expect to achieve the best in productivity and performance.
  • Will you try to determine how much each position in the company is worth to the business? Or will you set up wages and salaries on an individual basis, based on the qualifications and potential (and demand) of the person filling the position?
  • To what extent are the monetary rewards you offer your employees going to take in the form of salary, commissions, performance incentives or benefits?
  • Will you base the salaries on how well people perform or on other factors, such as how long they stay with you or what credentials (certifications) they brought to the job?
  • Are you going to award incentives based on individual performance, tie them to company results or use a combination thereof?

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Be sure to participate in the next Online Poll, which asks how kitchen and bath designers and salespeople are paid, online now.