Compensation as an Employee Retention Strategy

Employees want more than good income, or do they?

Recent research indicates that we need to focus more time and effort on the side-benefits of employment: flexible workings hours, childcare on-site, entertainment vouchers and a table tennis table in the lunchroom. However, I don’t know any employee, in any business, who goes to work to get better at table tennis or to earn movie vouchers. We all work to earn an income, support our family and lifestyle, pay off the mortgage, raise a family. That doesn’t mean we ignore the other factors such as recognition, respect, autonomy, that have all been shown to contribute to employee engagement. But financial compensation is likely to be most important for employees.

Remuneration structures are often complicated and can sometimes include factors that are proven to even demotivate, for example, discretionary bonuses. As in all areas of business, overcomplicating can be a huge trap. For instance, I worked with an engineering firm last year who sent me their bonus scheme spreadsheet. It was ridiculously complicated with pivot tables and what-if scenario calculations throughout. Funnily enough, when we surveyed their employees, no-one could explain how the bonus worked. No one cared.

Remuneration plans need to be simple, easy to explain and employees need to be able to calculate their bonuses manually. Otherwise, they will simply ignore it. As business owners, our remuneration is simple and often dependent upon cash flow. When the business makes money, we get a dividend. The connection is simple and easy to understand.

More profit = more dividends

A large part of my focus is to help employees think and act like business owners and be rewarded in the same way. If we can align employee earnings and behaviour with business goals, we can create a win-win scenario. This is not particularly difficult, as bonus schemes that match business outcomes are simple to design. For example, if we reduce time lost due to safety incidents below 4 hours per month we can pay a bonus of $10 per person. Or, if we can achieve a net promoter score of at least 80% for the quarter then we can increase the hourly rate by $1 per hour.

Importantly, these types of schemes are self-funding (any bonus or reward must be to work effectively). The change in behaviour reduces costs, improves sales or boosts customer retention. Part of that is used to fund the bonus. Simple.

If we can increase the alignment between employees and owners, encouraging employees to treat the business, customers and products the same way as an owner (through methods such as equity-based plans). Then we can get serious about having employees think and act like business owners.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.