Most small business owners find it difficult to structure remuneration packages that meet their organisation’s objectives and ensure that the company is able to retain key talent. Getting it right is critical. “The need for remuneration policy, strategy and systems to underpin business strategy has never been greater,” says Dr Mark Bussin, executive chairman of 21st Century Business and Pay Solutions.
“There is no such thing as the ‘best’ policy or strategy. There are so many different ways to determine remuneration and in different situations or circumstances, you may make different choices,” he says. He advises business owners to take several factors into account.
What To Consider
1. Organisation strategy.
In the same way that the vision and mission inform the strategic objectives of the company, so business objectives should inform the remuneration structure of the company. Also consider:
- The extent to which you want a centralised or decentralised approach
- The culture and design of the organisation
2. Where the organisation is in its lifecycle.
Industry and product growth rate and business lifecycle stage has a significant impact on remuneration strategy. For example, a company in the embryonic stage might place less emphasis on salary, benefits and perks, and more emphasis on share options and long-term incentives.
A more mature organisation might focus on ensuring salary and perks remain competitive, link bonuses to productivity improvement and have a reduced concern for long-term incentives.
3. Remuneration trends.
A trend is not necessarily best practice; but if more and more organisations are considering it, it may be important in ensuring that your business’s remuneration is competitive.
4. Reward preferences by employees.
Different employees have different drivers and may have diverse reward preferences. A weekend away might be suitable for some, while others will prefer additional leave or pay.
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Components of Remuneration
Traditionally there are four main components of remuneration – base pay; fringe benefits and perks; short- and medium-term incentives; and long-term incentives, but to these Bussin adds a fifth component – retention schemes.
“Every element of a remuneration system serves a purpose and it’s critical to understand what the organisation is trying to achieve with each,” he says.
1. Base salary.
This provides an employee with fair pay for a day’s work and should take into consideration the overall job requirements, accountability and complexity and diversity of the tasks required.
2. Fringe benefits and perks.
The purpose of these is to provide special payments and programmes that may set the organisation apart from its competitors.
3. Short- and medium-term incentives.
These incentives are designed to get results and ensure successful execution of the business’s strategic plan.
4. Long-term incentives.
These are crucial for retaining employees and focus attention on the achievement of longer-term strategic imperatives.
5. Retention schemes.
This is often added when the long-term incentives are not in place or not working for some reason or another. When implementing a retention scheme you need to decide who it will benefit (scarce skills, for example). Most importantly, such a scheme needs to be underpinned by a robust business case.