In my experience in the Government Contracting sector, compensation is basically comprised of pay in various forms and benefits. They are Base Compensation, Retention Based Compensation, and Owner/Partner Compensation from personal experience, I’ve seen the big messes when the Incentive and Retention tiers aren’t well thought out by the company. I’ve also witnessed the challenges that small businesses face when the base compensation tier isn’t well defined and left to the mercy of the hiring manager, recruiter, and human resources to negotiate per candidate.
Base Compensation Program
Base Compensation Programs are comprised of pay rate or salary and benefits. Benefits can include insurance coverage, training, education, retirement plans, holidays, and paid time off, student loan payments to name some.
It is ideal for an organization to have a compensation philosophy. This creates a framework for executives, managers, recruiters, and human resources personnel to operate within. This philosophy is highly dependent on your industry and the type of work your organization does.
For example, a company providing highly technical and specialized services or one that recruits from a small pool of available candidates based on experience, expertise and suitability may look something like: We provide above market pay and benefits programs.
Having a philosophy will enable your team to operate more effectively as the philosophy will enable the creation on a framework that streamlines recruiting of new staff by eliminating “one off” decisions. It also can support your performance management program which should entail parameters for merit increases and professional advancement of staff into management and potentially executive roles.
Incentive Based Compensation Program
Every employee is hired to perform a certain set of defined tasks and other tasks as assigned. What types of behaviors does your company want to reward employees for performance? Incentive compensation is designed to encourage and drive those behaviors that the employee can reasonably obtain through their own efforts. They should also understand clearly how these are measured, calculated and paid.
A very simple Incentive Based Compensation Program for a government contactor could reward an employee that bills 460 hours (based on a 1,840 billable hours/year) in a quarter with a “x”% quarterly bonus. To build on that, if that employee qualifies in “x” quarters per year then that employee qualifies for an additional “x”% annual bonus.
Managers can be incented in other or additional ways based on what financial metrics are valuable to your company such as project profitability, deployments completed on-time, additional positions added to the contract or others that meaningfully drive performance toward your company’s annual plan and are reasonably obtainable and understandable.
Retention Based Compensation Program
Retention and incentive compensation programs can easily become lumped together if care and forethought aren’t taken to develop each independently. Unlike incentive compensation, retention compensation isn’t paid to the employee as a cash bonus. Retention compensation creates a longer-term commitment between the employer and a key employee or company executive.
This can be accomplished in many ways short of providing real equity to this person. A simple solution could be to provide some profit sharing or non-elective contributions to the key employee within the company retirement plan. There are ways to provide different levels of corporate contribution to employees in addition to simple matching and safe-harbor programs (which typically fall within the Base Compensation Program).
There are other programs that fall outside of ERISA and allow for the company to make choices for specific individuals that can be funded and/or insured while providing the company with protection in case the employee departs. These types of programs need to be thought out and commitments made beyond what is expedient today. If clear bright lines are developed and directly communicated to the key person(s); he or she will not see the value. I’ve seen employers fail to understand the difference between incentive and retention pay resulting in frustration on behalf of the employer and employee.
In addition to the based benefits and the ability to utilize some of the same instruments from the Retention Programs, owners and partners should develop and curate an exit strategy.
An exit strategy should encompass both the sale of the corporation and in the case of multiple owners the exit (death, disability, retirement, etc.) of a partner short of a corporate sale. Health of an owner/partner or partner family member can impact corporate performance. Other life events could result in an owner/partner choosing to move on from the corporation.
A plan should be in place beyond the basic founding documents that were developed and executed prior to achieving any measure of financial success. These are detailed and personal discussions that result in the creation and/or modification of legal documents. These discussions are best done well in advance of any real need to ensure the best outcomes for all are achieved. Some of these risks can be funded internally and others insured. Simply put if your partner dies, would you want to be in business with his or her spouse? What if your partner is incapacitated in any number of ways and can’t contribute to the business, would he or she still be entitled to pay, profits, and distributions?