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.