Compensation plans at smaller companies in many cases are rather haphazard affairs, a pastiche of a series of ad hoc decisions. Some companies, however, have created similarly varied pay plans, not through accident, but as a conscious attempt to mold the plan to address the people and challenges within the company.
That was the case at Custom Components Inc., a highly profitable made-to-order military solid-state components manufacturer in Lebanon, N.J. At Custom, president Charles Blaine had to make distinctions in his compensation plan to acknowledge the difference responsibilities and professional backgrounds of his top two managers.
The chief issue for his production manager was motivation. In Custom's early days, the around $2-million company had enjoyed a heady financial performance that included gross profit margins upward of 70%. After a few years, though, Blaine noticed that the margins were slipping a percentage point here and there.
Blaine decided to change the way he paid the general manager, who is responsible for production and who also carries the title of vice-president. Up until that point, the employee had been taking home a fixed salary with no incentives. So Blaine added a monthly bonus plan, triggered once gross margins reach 55%. Above that point, the manager receives a share of the gross profits that climbs in eight steps from .75% to 2.5%. The maximum rate is reached when gross margins are at 72.5% or higher. In a good year, that could add up to $12,000 to $15,000.
"Let me tell you, that really works," says Blaine, flipping through sheets of paper to check gross profit margins for recent months. "Before we instituted that, our margins were around 60%. Last year, the company's gross was over 75%.
"It was to motivate him," Blaine says of his general manager. "You have to make [the incentive] key to whatever he controls."
The problem was quite different when Blaine set out two years ago to hire a top engineer to oversee development of a new product line. The engineer, recruited from an established company on Massachusetts Route 128, wanted an equity stake for making the move to the tiny New Jersey company, but Blaine didn't want to part with any of his holdings. Instead, he set up a second company to manufacture and market the new products and gave his new hire a piece of that company. The new vice-president also receives 10% of net profits once the net return passes 10% of sales.