It is well known that monetary rewards change the way an employee views his or her employment or work. Having said that, the present compensation system, which believes in rewarding the employee every year in the form of bonuses, irrespective of whether or not he or she has performed, holds very little motivational value to the employee. Therefore, employers are busy in finding ways that will make their compensation plans more effective.

Linking Compensation with Profits

One of the important steps taken by most companies today is to link their compensation plans with profits. In other words, if the company profits in a given quarter or year, the employees involved in bringing profits to the company will be compensated with monetary rewards. This has helped many companies provide incentives to the employee, thus encouraging them to perform to their fullest and enhance company profits.

Direct Relation between Performance and Pay Hike

If you really want your compensation plan to be effective, it is important to show the employee the direct relation between his or her performance and the pay hike received. In other words, the exact nature of work done by the employee, which has resulted in profits, which in turn has resulted in the latter's pay hike should be clearly visible. This is a motivational factor, which will enable the employee to work better and gain more benefits.

Fixed and Variable Compensation

While designing effective compensation plans, it is important to decide the exact amount of the compensation you want to keep fixed and the amount that is variable. Most employees, especially at the lower levels, are not willing to risk their entire salary amounts and require a certain base salary. Therefore, while designing plans, you should fix a certain amount as their base salary, which is to be given every month and a portion to remain variable, which depends on their performance, profits etc. A simple rule of thumb states that about 20% of the employee's pay should be allocated for incentives or benefits linked to performance and profits.

Timing and Frequency of Compensation

It is important to remember that incentives or compensation plans are designed to be motivators to employees to work better. Having said that, it becomes important to ensure that the compensation given to the employee is immediate and linked to the work done, which ensures that the employee understands the link between the compensation and work done and is motivated to repeat it. Under these circumstances, bonuses or benefits once a year is passé and not really beneficial. However, it is up to the company to design an effective plan, taking into consideration these aspects.

Communication is the Key

Lastly, once your compensation plan is properly designed, communicate clearly with your employees as this is extremely important for the success of the overall plan. It is important that they understand the changes that are being made in compensations and the reasons for doing so.