Build advanced compensation plans

1. What advanced compensation is for

At this stage you are bringing in higher-level talent, so you need compensation plans that differ from one another and can be customized to each person's level of experience and to what you need them to do in the business. That is what advanced compensation does: it attracts people, it retains people, either one or both.

Item	At this stage (20 to 49 people)
The constraint	You could not get higher-level talent, because they expected full compensation packages
To graduate	Set up benefits, retirement and advanced compensation plans, so you can get that talent and keep it

Picking the benefits themselves, and bringing them to the team, is SOP 159 — Select and roll out employee benefits.

2. Build the plan in five steps

The five steps are each named with the same letter. In order:

1. Set strategic goals. Decide what you want to achieve: do you need to attract people, or to retain them? Define, too, whether pay will be performance-based or market-driven. A lot of times, thinking about advanced compensation comes down to this: are you just paying someone the market rate for the role, or making pay depend on what they do once they are in? Take someone who comes in to a CS role, for example: will you pay them on growth, on retention, or on both? Know what the goal is when they come in: to drive performance and growth, to drive retention, or both. The suggestion given is not to make it more than two things at this point, because that gets too complex: two at most, and one is ideal.

   One last point on goals: nobody has complete control over any one metric in your company, you included. A lot of people bring up sales, and that is understood; yet you also need people incentivized to work with sales to affect retention, by fixing the sales calls. Since no one person fully controls any one metric, find the metric each person has the most control over that drives the most growth for your business, given the goals you have.

2. Segment and structure the pay elements. Think about salary, then bonus or performance pay, then benefits, all to motivate the team to line up with the business goals. Base pay, some kind of bonus incentive and benefits together make up compensation. Compensation is not just the paycheck someone gets; it is also their benefits and their bonuses, so think of them as a package rather than as separate things. The shapes described:

   • You could lead with salary: a really high base pay, then lower performance pay and passable benefits.
   • You could instead pay not much in salary, with outstanding benefits and the chance to make a lot of money on performance.
   • A lot of businesses of this size, it is said, lead with performance: really high earning potential, a mid-level salary and good benefits. Neither the salary nor the benefits is competitive on its own, but the performance pay makes people see they could make up to a given amount. That is usually good for businesses of this size, because so much is driven by each person's performance. You have only between 20 and 50 people on your team, so it is really important that they perform, and you want a competitive environment.

3. Study market trends. Look at the industry you are in to get benchmarks, so you stay competitive and attract the right people. What you pay differs by industry: a sales rep in a lawn care business will make probably a third of what someone selling enterprise-level software makes, if not a sixth. It is a completely different ballpark, because the lawn care rep sells something less expensive. If the thing you sell costs less money, it is likely that the performance pay on those roles will be lower, and a lot of things affect market pay. Another example: you will pay far more in the market for a chief financial officer at an investment firm than for one at an online store selling to consumers. The investment firm needs more skills, so the skill is worth more to that business and is harder to find in the marketplace. At the store, you just need them to count the money and make the profit and loss statement; at the investment firm, you have them handling, in the words used, hundred million transactions. Which skill is more valuable depends on the industry of the business.

4. Set performance metrics. Define clear goals and incentives that tie to each person's performance plan. You can do this with benefits too, but the suggestion at this point is to tie only bonus pay and increases in salary to the performance plan. In practice that means tying career growth to pay growth. If you can clearly define someone's career path to grow in their role, and tie it to bumps in compensation, or even to increases in the percentage of their bonus or performance pay, that can retain people, raise performance, and be really attractive to top talent you are trying to bring in.

5. Share and simplify. Roll the plan out with clear communication, get feedback from the person, and adjust as your business grows. Each level of management will really have its own template for the plan. For example, you might have a first level of leaders, your managers, and then your directors. For the managers, you might decide, based on the market, your size and your growth goals, that a bonus of up to 25 percent of salary makes sense. For the directors, it might be that people can earn up to 75 percent of their salary in bonus. Roll that out, then assess it every year: look at your bonus pools, your performance pay and your advanced compensation, and ask whether it still fits your business goals. It is called a great place to start now, because at this point you need it to attract and keep that talent.

3. Build it when there is a problem

A caution follows the steps. Consider these more advanced structures if a problem occurs: either you cannot get high-quality talent to come in, or the high-quality talent you have is leaving for better opportunities. The caution is against learning about these plans and immediately building very advanced compensation plans when you have no problem, when talent comes in and stays. If you have neither problem, in some ways you want to delay this complexity as long as humanly possible.

If instead you put a job requisition out and get no bites, you might have to raise your level to get the kind of talent you want. That assumes you have already checked the job description, know how to review résumés and have done the other basic things, and really just need to increase the offer. The biggest way to find that out, in the view here, is to study the market: study the benchmarks of your industry, and if you are already paying at the benchmark, likely none of this needs to happen.

4. What this page does not decide for you

• Which element the second shape leads with. The shape with a low salary pairs outstanding benefits with a chance to earn a lot on performance, and names neither as the lead. Not established on this page.
• Whether the investment firm's hundred million transactions is a count or a sum of money. Not established on this page.
• The bonus percentages. 25 and 75 percent are examples of what you might set for managers and directors, not rules. This page gives no figure for other levels.

5. What this page does not cover

Equity and profit sharing, set against paying senior leaders on objectives, are on SOP 270 section 12, whose flag sets pay on objectives against a profit-share pool. Retirement plans are not covered on this page.

How raises are sized by performance category, and how a teammate asks for one, is SOP 134 — Set pay increases. Job descriptions and résumé review are SOP 148 section 8.