The 5 Golden Rules of Paying People

Over the last hundred years or so, companies have dreamed up increasingly complicated ways to pay people.  As compensation practices became more sophisticated, they also became less humane and consequently, less effective.

I prepared the following list to help my friends, clients and colleagues get better results from their employees by compensating them the way we would all like to be compensated.

Rule #1 – Seek Win-Win Deals

I learned a great lesson from an executive negotiating course that I will never forget.  When you are negotiating a deal on short-term transactional items, such as a buying a car or purchasing an item in a flea market, your aim should be to get the best possible deal for yourself.  However, when you are negotiating a deal with someone that you plan to have an ongoing relationship with, such as a supplier or an employee, your goal should be to make sure you get the best deal for both parties.  Why?  Because when someone with whom you have a long-term relationship with feels that they got a bad deal, they will always find a way to get back what they feel they lost.  When negotiating wages or salaries, make sure your employees will be happy with the deal until the next scheduled compensation review.

Rule #2 – Beat them to the punch

Sometimes people’s value to the company increases a lot in a short period of time.  When that happens, make sure to offer them a raise before they ask for it. Why?  Play out these two scenarios.  Scenario 1: the employee feels undervalued so they ask for a raise.  You give them a raise.  They think “That cheapskate would never give me a raise if I never asked for one.”  Scenario 2:  You say “Your contributions to our team are sincerely appreciated.  Please accept this raise as a token of our appreciation.”  They think “My boss is awesome!”  They tell their family and friends what a great company they work for.  They become more engaged and more committed to helping the business succeed.  Two completely opposite outcomes; one simple managerial intervention.

Rule #3 – Make compensation a non-issue

Contrary to popular belief, financial incentives generally do not improve performance.  This well-documented fact is consistently lost on most business leaders to the detriment of their companies and society.  If you offer people more money, they won’t work any harder; they will just be less likely to become dissatisfied and leave.  People are motivated by opportunities to do the work that they do best and to make a positive difference in the world.  They are motivated by having have autonomy to make decisions without always having to run things past their boss.  And they become even more motivated when their contributions are recognized and appreciated.  Don’t pay people to reward or motivate them, like using doggie treats to train a dog.  Pay people enough to make compensation a non-issue and motivate them in other ways.

Rule #4 – Recognize good performance

People who keep asking for a raise are really just trying to tell their company that they don’t feel appreciated.  People need to feel that their contributions are valued.  The “no news is good news” mantra of the ‘crusty old man club’ is not just outdated thinking, it also reveals how little they understand human nature.  When employees don’t get enough recognition, they will seek it the only way they know their boss will be forced to acknowledge their value: money.  Managers who don’t consistently show their employees that they value their contribution had better be prepared to pay up or else continue to churn through disgruntled employees and get mediocre results from the ones that stay.  On the other hand, managers who learn the power of positive reinforcement can expect higher performance from their employees, less turnover, and more employee commitment to the organization’s goals.  (Check out 6 Ways to Show Employees They Are Appreciated)

Rule #5 – Establish a routine

Set a regular time to review compensation.  Very few small businesses have established an annual routine of reviewing wages and salaries.  That is a mistake.  When there is no formally established time to talk about compensation, any time the subject comes up the mood instantly becomes tense and both parties assume dueling postures.  Establishing an annual compensation review eliminates the tension and the subsequent fallout that usually occurs when employees spring this subject on their boss.  An annual compensation review allows a manager to divert compensation discussions to a time when they are prepared to have them.  It also sends a strong signal to employees that the company is serious about paying them fairly.  Note: when establishing annual compensation reviews, managers should be clear that employees should not necessarily expect a raise every year.

Compensation does not have to be a sensitive subject with employees if managers consistently apply these 5 rules.


3 Responses

  1. I enjoyed the compensation focus of this article, it is a key issue that is often avoided. I like the comment about motivation, compensation is a hygiene factor, meaning if it is not satisfactory, people will be upset, however increasing pay will not motivate. Motivating factors are things that you mentioned, encouragement, autonomy, and decision making authority. Another motivating factor is development, often cited as the biggest motivator for many employees. Employees want the opportunity to grow and build skill, to access training and coaching services. As you stated, people are not just there for the pay check, they want to contribute.

    Another thought I had in regards to compensation was individual rewards vs team rewards. Not many organizations are rewarding based on team performance however they are increasingly relying on teams to manage important projects and even giving them decision making control. The challenge is encouraging team work when the reward system does not… perhaps not totally what you are focusing on here but it is an interesting compensation issue today.

    1. Thanks very much for your comments Tanis. Yes, I totally agree that development is a major motivating factor for employees, and is correlated to higher retention rates.

      Compensation for team performance is tricky. I think you need to first be very clear about why you are rewarding people. In other words, what results are you trying to produce? If you are using compensation as an incentive, the research shows that it won’t improve performance. If you are trying to engender good feelings and loyalty to the company, I can think of a lot better ways to spend the money to produce the desired result. In short, I have’t seen a team rewards system that produces a solid ROI. If you are aware of some research on the subject, I’m certainly open to changing my opinion.

      I really appreciate your contributions Tanis.


  2. Very good comments especially for small business. I have found that larger companies generally have well established compensation guidelines such as grids for the job and specific times for reviews.

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