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Tie Employee Compensation to Firm-Wide Returns: 6 Steps

Pay bonuses based on your company's overall financial success, and get your employees pulling in the same direction.




As a business owner or manager, one of the most difficult things to oversee is compensation and expectations at employee review time.

Initially we at User Insight did the same thing most companies do: a review after an employee's first six months, with annual reviews every year after that. Along with the review usually came some type of bump in an employees' base pay. But as a consultancy, we have the added complexity of ebbs and flows in the amount of work we are servicing. Inevitably, employee review times would be fall during the slowest periods of the year.

This caused several issues. As a business owner, it's difficult to increase overhead at times when business is slow. Even if you know you're just in the down part of a regular business cycle, it still makes your judgment more conservative. So, we found once a raise was in place, business would inevitably heat up, and an employee wouldn't experience a financial impact that was in sync with his harder-working performance. He didn't directly feel a reward for his work. In fact, I often heard groans when we signed a big round of new business.

To resolve these problems, we sought to tie a large portion of our employees' compensation to the performance of the company. Our operations manager at the time, Rachel Walsh, proposed how it would work.

Here's how:

1. We now conduct quarterly reviews.

2. As a company, we set a revenue target each quarter.

3. We take part of the money we had budgeted for raises and instead pay it out on a quarterly basis tied to company performance.

4. Each employee is given a goal that is a percentage (about 10%) of his or her salary.

5. As the company achieves the quarterly goal, each employee can achieve the equal percentage of his or her individual target.

6. We allow the achievable percentage to rotate above 100% if the company outperforms expectations for a given quarter.

Though these tactics were hard to adjust to at first–not having a known dollar "number" was frightening–we put the program in place. And it has been very successful. Conversations about compensation are now rare at User Insight, and only when an employee takes on a substantial new level of responsibility.

We've had times when bonuses have been paid out at more than 150% of expectation, but that worked because the company was doing well and employees had stepped up to deliver the work that was needed. Likewise, when the company is not mapping to goal, we save money on overhead.

The quarterly reviews have also been very helpful. The results allow us to look at the organization overall on a more frequent basis, determine what's going well, and discover ways to improve. We have a better understanding of how we're doing as a company. We regularly release the percentage of revenue target we have achieved, so employees know right away if we are ahead or behind.

The best thing that changed: Now everyone cheers when we sign a new deal.

Last updated: May 17, 2012

ERIC V. HOLTZCLAW is a serial entrepreneur who has founded multiple startup companies, including one of the first profitable Internet enterprises. His last company appeared on the Inc. 5000 three years in a row. Holtzclaw advises clients on the whys of business--why customers buy, why teams work, and the all-important "entrepreneurial" why. He is the author of Laddering, and his weekly radio show, The "Better You" Project, shines a spotlight on entrepreneurs' individual business journeys and successes. To learn more about Holtzclaw, visit ladderingworks.com or e-mail eholtzclaw@ladderingworks.com.

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