Remunerating for profitability

To ensure that wages and salaries are a profit-centre, not a cost-centre, for your business, it helps to tie them into profitability. Here are some ways you can do this:

Factor in value when setting wage and salary levels

It is important to factor in the value of both the work and the individual's contribution when setting wage and salary levels. Begin by assessing the value of a particular job. Here, you must look at the work, not the person doing it, and ask how much value it adds to your business. Based on this assessment, you can set a wage or salary range for the job. Of course, you will also need to keep an eye on the labour market and be sure to set and maintain remuneration levels that are competitive.

The next step is to decide where on the wage or salary range to position a particular individual, and when it is appropriate to offer additional incentives. Here, you are looking at the individual, not the job, and evaluating what value his or her performance adds to the business. You need to assess traditional criteria such as attendance, motivation, initiative, reliability, and safety, but the most important thing is to evaluate the individual's contribution to the profitability of the business and reward it accordingly.

Devise incentive schemes for both individuals and teams

If you introduce incentive schemes, make sure you design them to improve the performance of both individual employees and the business as a whole, not one at the expense of the other. Incentive schemes that focus exclusively on improving individual performance can sometimes undermine teamwork and thereby overall productivity. On the other hand, schemes that focus on improving firm-wide performance provide little incentive for above-average performers to go the extra mile. Not only does this deprive your business of their best efforts, it also increases the risk of your star employees feeling they are underperforming and therefore looking elsewhere for something more challenging.

To get round this, consider offering an annual salary bonus to key employees who meet specific short-term goals, but with half the bonus awarded if the individual achieves his or her individual goals, and the other half if the firm as a whole meets its general goals. Businesses that have tried this approach report considerable improvements in productivity.

We would be happy to help you review you remuneration policies to ensure they are contributing to overall profit improvement in your business.