A transient workforce and increased competition for talent have companies hearing this question more and more. From profit sharing to "phantom" stock plans, innovative CEOs and managers are experimenting with new compensation techniques.
With unemployment now at a five-year low, managers are facing increasingly tough competition in hiring and retaining good employees. While throwing money at the problem is still a solution for many, the way in which they throw that money has undergone a change in recent years -- everything from profit sharing to "phantom" stock plans.
That's been especially true for smaller employers, which often have a harder time absorbing the cost of pay raises and benefits than large corporations do. At the same time, a growing number of people punch their time cards at small businesses today -- some 57.4 million Americans, more than half of the private-sector workforce, according to the Small Business Administration.
So how have small businesses kept pace? More and more, they're experimenting with creative versions of variable pay, and relying on alternative compensation methods. Tying compensation to the success of the company has kept their employees satisfied, their company culture healthy, and their businesses growing.
A New Way to Pay
"Most small companies don't have the money to spend on annual salary increases," says Dan Moynihan, principal of Compensation Resources, an Upper Saddle River, N.J.-based human-resources firm. So employers are using incentives, work-life programs, and other non-monetary forms of compensation that are better suited to small businesses.
Variable pay comes in many forms, explains Moynihan. "But there has been a lot of recent interest in formalizing incentive plans in small companies."
Why the shift? "Incentives, as opposed to end-of-year bonuses, create an upfront understanding of expectations and rewards," Moynihan says. Such payment structures are less subjective, which can reduce feelings of inequity among employees.
CIK Enterprises, an Indianapolis-based print marketing firm, uses a phantom stock plan with short - and long-term incentives for the employees. How does it work? Without receiving any actual legal ownership of the company, CIK employees get a "phantom" 20 percent of the company's stock. Its value is fed into a long-term bonus plan for employees that stay more than seven years.
"This is their long-term incentive to grow" within the company, says chief operating officer Andy Medley.
Additionally, the short-term plan doles out 30 percent of the company's profit as quarterly bonuses (after a pre-established threshold of $5,000 per employee). CIK practices open-book management, so every employee knows how the company's finances -- and bonuses -- are shaping up throughout the year.
For many years, offering employees actual stock in a company was a popular way to both reward good performance and align the interests of the employees with those of the company. Last year, however, the Financial Accounting Standards Board revised the Generally Accepted Accounting Principles regarding employee stock. The changes to FAS123 made it more difficult for private companies to value and account for employee equity.
"Equity incentives have become too cumbersome for many small companies to deal with," Moynihan says. In their place, phantom stock is emerging as an easier way of tying compensation to the profit of the company, without all the red tape.
"It builds momentum, excitement, and a sense of teamwork," says Medley, who gets the same bonus as everyone else in the company -- from receptionist to CEO. Last year, that was $6,000 on top of salaries.
And it seems to be working. CIK projects $32 million in 2006 revenue, up from $22 million in 2005. The staff grew from 50 employees to 80 over the last year, and Medley says employee retention is among the least of his concerns because of the company culture -- of which the stock plan has become a big part.
"We're not the highest-paying company, but we're a little above average and we provide a unique work environment," Medley explains. "We're always very fair, and people see that."
It's Not Just About the Money
"While employers have been trying to get the pay-for-performance thing right, the idea of total compensation has been gaining popularity," says Ken Pinnock, director of HR services for the Denver-based Mountain States Employers Council. Total compensation considers all forms of imbursement, including non-monetary compensation, such as training and education.
According to Pinnock, there are three major benefits that employees are increasingly looking for: recognition, professional development, and a work-life balance.
"Recognition continues to be a big part of compensation -- from promotions to spot bonuses, and even in smaller ways such as informal recognition for a job well done," Pinnock says.
In today's professional world, Pinnock explains, company loyalty isn't what it was a generation ago. The Bureau of Labor Statistics reported in January 2006 that the average employee had been at their job for only four years. Consequently, employees want to learn skills that will serve them well at more than one company.
"Employees are saying, 'If you won't necessarily keep me, then train me,'" Pinnock says. As a result, employers are spending resources to develop employees business expertise, to pay for secondary and specialized degrees, and to act as mentors.
Perhaps the most significant forms of alternative compensation come as work-life programs. Pinnock says employees are increasingly looking for employment that will take their lifestyles into consideration. Companies are responding with gym memberships and other health-and-wellness programs, company retreats and other team-building events, and even what Moynihan calls "psychic remuneration" -- maintaining a socially responsible company culture and offering days off for volunteer work.
"Small companies can afford to be flexible," Moynihan says. Flexible scheduling and opportunities to telecommute can be hard to come by in a large bureaucratic corporation, but small companies have the ability to adjust on more of a case-by-case basis.
"Always consider the competitive landscape around you, what you can afford, and what you can provide that other companies can't," Moynihan advises other employers. "You need a pay philosophy from the day you open your doors. The system comes out of that philosophy should be able to change with the company's needs and the needs of its employees."