Let me share my preferred approach to employee compensation.
I think the best compensation designs are simple and do not try to do too much. They should do the necessary minimum work of paying people fairly and then get out of the way.
In my ideal world, a clear and straightforward employee rewards system - supported by easy-to-use technology - would get pay issues dealt with swiftly. It would also encourage managers and employees to not spend too much time thinking about pay.
A look at pay levels and why they should be forgettable
Let's start with pay levels.
In some cases it makes sense to pay high to get the best people; in some cases there is no choice but to pay low. However, most of the time somewhere near the middle of market rates is fine.
If you pay a bit above average it makes attraction and retention a little easier. If you pay a little bit less than average you can save money that can be invested elsewhere (for example, training, better facilities, etc.).
All in all, it may not matter that much whether you choose to be a little high or a little low; other factors will have a bigger impact on your ability to attract and retain talent.
Ideally I like the level of pay to be forgettable. I want employees to think, "Yeah, we get paid here pretty much the same as we'd get somewhere else." That is a good outcome.
Consider incentives and how they drive behavior
Now consider incentives.
Most sales jobs have commissions because that's how sales reps expect to be paid. However, sometimes commission plans evolve into massively complex incentive schemes where all sorts of people get rewarded in different ways on any given transaction.
All this complexity focuses attention on the incentive system; not on the customer.
Simplicity is better. Drive sales rep behavior with good management, not with a complex incentive scheme.
The challenges with performance bonuses
At least with sales positions performance is relatively easy to measure.
For other jobs it may be difficult to accurately assign fair bonuses. Performance may be hard to judge; results may depend on luck as well as effort; and individual results can be hard to separate from team performance.
Put in a scheme with substantial bonus payments, and the focus ends up on the bonus system not on the business.
Bonuses are a good way to reward people, but keep them simple and don't give them too much weight.
The ups and downs of profit sharing
Profit sharing can make sense.
If the company is doing well then it just feels fair to share the wealth. If the company is facing hard times it is reasonable to ask employees to share the pain, especially when it can save jobs.
However, while it's easy to share the gains, there are limits to how much of the pain you can share. Cut back too hard on the profit-sharing that people have come to expect, and you'll lose them.
Sharing gains and loses has an important symbolic power for a company that wants to build a sense of community; but it's the symbol that matters, not the raw dollar amount. Keep it slim, keep it simple, and don't ask too much from your profit sharing plan.
The benefits of a robust, quiet employee reward system
Employee reward professionals should build a robust quiet system that does the basics well and is then forgotten.
There are other HR tools that are more effective for attraction, retention and motivation - use those tools and let employee reward be the quiet function of HR.
Of course there are some people driven mainly by money. These people won't like quiet employee rewards.
That's okay, they can go work somewhere else.
I'll stick with the professionals who are motivated by doing a great job, by innovating, by adding value to the organization, by helping customers, by developing teammates, by being part of an organization that in its own way makes the world a better place.
These people just want to be paid fairly; beyond that, their real interest is doing good work.
Your turn: What do you think about making employee rewards a "quiet" function?