Employee Compensation in Tight Times

Cynthia Umphrey
April 14, 2008 — 1,216 views  
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I have found that many of my business owner clients feel guilty and worried because they cannot afford to pay their employees as well as they have in the past. Others just want to retain and motivate key employees, but do not know how to do it cost effectively. I’ve found, through personal and client use, that certain plans and incentives work well, yet are cost effective. Some are simple, others are more complex. -A Positive Workplace- Believe it or not, for many employees, the workplace ambience is incredibly important. It may be cliché that a happy employee is a productive employee, but it is also often accurate. If you or your client’s workplace is not a happy and cooperative one, you may as well start here. A positive motivating environment starts at the top. The business owner should know and use as many employee names as possible. A smile and simple “good morning, Kerri,” costs nothing, but it lets Kerri know that at least on a basic level, the boss knows who she is and recognizes she is a human being and not just a cog. I feel all management should be trained to treat their employees with dignity and respect, and they should expect the same from their employees. I am not advocating friendships with employees, which create problems. Instead I am suggesting that being polite, upbeat and showing that you know even the lowliest employee is an actual person can go a long way toward improving the feel of a workplace. Sprucing up with fresh paint, a new plant and the occasional tasty treat in the break room can also brighten moods. Creating a suggestion box for low-cost, highly creative ways to keep a positive working environment is an easy way to encourage employee involvement. Praise costs nothing, but is highly valued if actually meant and given when appropriate. You can acknowledge an employee’s extra effort by sending a praising email and copying the entire organization. A hand-written thank you note to employees who go above and beyond is also a great way to deliver praise. -Bonuses vs. Flat Pay Raises- Consider performance based bonuses instead of flat base pay increases. Many companies give out base pay increases each year to their employees. Those increases are now permanent. This means they set a new “base” against which the new raises will apply. I think of this as similar to compounding interest in a bank account, and it creates particular problems if the raises are percentage based. Instead of increasing base pay, you could divide the amount of money you have available to give raises amount amongst your employees based on their performance. Then, give it to them as a bonus and not as a base pay increase. If properly explained to the employees, they will understand that they can make more money under the bonus system than the flat raise regime if they are top performers. This may also help weed out those who have no interest in performing and instead have an entitlement attitude. Most of us do not want the lazy and entitled as our employees. Of course, if a company has a long history of flat raises, a dramatic change would likely be disruptive. For such companies, a gradual introduction of modest bonuses coupled with modest base pay increases that, over a period of years, moves more toward the bonus structure works well. Bonuses can be paid out over the year or in lump sums in any way that is the best fit for the company. -Key Employees- For really key employees and members of management, consider a “golden handcuffs” plan. If properly done, this incentive plan ties the employee to the company and motivates the employee to achieve the business goals. The basics are: 1) The Owner decides which employees are in the plan; 2) The Owner ties the employee’s reward to something you want the employee to achieve (it must be something that is actually within the employee’s control); 3) The Owner decides how much, if any, of the reward is to be paid currently and how much is to be in the “handcuffs” (to be paid at some point in the future); 4) The Owner picks the vesting schedule. I like a five year rolling vesting schedule so that each year in which the employee is awarded something under the plan, a new 5 year vesting period starts. This means that an employee who leaves early always leaves at least 4 years of any given award on the table. The Owner also needs to decide the conditions under which the vested portion will be paid to the employee. Often it is not payable until retirement, the sale of the company or its assets, or the employee’s death or disability. It is typically subject to forfeit if the employee is fired for cause. The Owner can also decide whether the vested portion is paid out over a period of years or in one lump sum. The employer retains the right to terminate the plan at any time, subject to amounts already vested. If there is not already a non-competition agreement from the employee, this is a great time to add one, both for morale purposes and legal enforceability. For the more complicated concepts such as golden handcuffs, an experienced advisor is necessary to be sure the right protections and provisions are in place. When properly done, these plans can be very powerful. But do not overlook the very basic things you can do to boost employee morale. Particularly in strained economic times, we have to come up with creative ways to bring fun and teamwork back into our offices.

Cynthia Umphrey

Kemp Klein Law Firm

Cynthia Umphrey helps families and business owners make significant personal and professional life decisions. Ms. Umphrey calls upon over 10 years of experience in estate planning, probate administration, business structuring and business exit planning to guide you though life's most important choices.