When Should You Change Your Compensation Plan?

Beth Carroll | Prosperio Group

Companies often struggle with the question of timing for making changes to their compensation plans. Some never change, while others change far too often. So, how do you know when it is the right time to change?

For starters, your compensation plan is not a “fix it and forget it” part of your business. If you are like most brokers, the money you pay to your staff is likely your single biggest expense. As with every other part of your business, you should be constantly monitoring this operating system to make sure you are getting the appropriate ROI. Yes, compensation is an operating system. In fact, one might say it is the operating system as you need people to work in your business and those people are not willing to work for free. So, what and how you pay them will have a tremendous impact on the success (or lack thereof) of your business. You must monitor how well this system is working for you and be prepared to change it if you are not getting the results you need.

A good strategy is to evaluate your compensation plan’s effectiveness every year and make tweaks, as needed, to insure the plan is operating as it should be. Consider this an annual tune-up. Then every two to three years the program probably needs a thorough overhaul, from what roles you have, and what is the best organization structure. After that, look at how your employees fit the new model. Chances are the old way won’t work if you’ve changed structure or roles. Your compensation plan will have to be adjusted to keep up, or people will keep doing what you pay them to do, even if you are telling them they should be doing something different.

So, if changing a plan once a year is a good thing, does that mean changing a plan more than once a year is even better? No. You need to let your employees have time to learn what the plan is asking them to do, and to adjust their behavior to be successful under the plan. Barring some cataclysmic design flaw that is going to leave you bankrupt, or cause all your employees to quit, it’s better to leave a sub-optimal plan in place for a while than to change too quickly or too frequently. If your employees know and expect that updates happen every year, they can look forward to compensation 2.0 that will make significant improvements over version 1.0.

One of the primary mistakes owners and managers make when thinking about compensation is thinking the magic is in the math. It’s not. There are many different compensation approaches – thousands probably – and any number of them could help you achieve your objectives. Getting your hands on a competitor’s compensation plan is like stealing the other team’s play book before a big game. You might get some ideas of different strategies you can try, but there are many books available on Amazon that will do the exact same thing. You don’t need to “cheat” to get that information. And the reality is that any company’s compensation plan is only one part of a much bigger system. If done right, it integrates into your system in supportive and motivational fashion.

If done badly, it can turn your organization into a toxic mess of infighting, backbiting, and general dysfunction. Some organizations can handle (and indeed thrive in part due to) very complex plans, with lots of elements, challenging mechanics, and spell-heavy administrative requirements. For other organizations, this type of plan would be death. They can’t understand it, communicate it or support it. These organizations need more simplistic designs. Some organizations have very strict role definitions and people stay within their roles for long periods of time. These types of companies can develop more precise individualized performance metrics and use care only to change people’s roles at the start of a new performance period. Other organizations prefer their people to be flexible in terms of role assignments, moving people frequently as the business needs arise, even if this is in the middle of a month. These organizations need to lean more heavily on team metrics that reward for this collaborative and flexible approach.

If you have worked with a consultant to help you develop a plan, you should never feel that you need to apologize for changing the plan after your work together is over. A good consultant should be teaching you how to manage the process on your own. They will be thrilled when you tell them that you’ve been making updates and tweaks based on what you learned from them.

Beth Carroll is owner of Prosperio Group, a compensation consulting firm located in New Lenox, IL. She may be reached at [email protected] or 815-534-9204.