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University of Massachusetts Amherst

Family Business Center

What is Good Pay?

by David Merrill

"So! You want to be a millionaire", suggests Regis Philbin on the very popular quiz show he hosts on television. In compensation circles these past few years, the popular refrain could be amended to, 'So! You want to be a billionaire?' Everybody seems to be getting into the act. I read a short while ago that Derrick Jeter, the young upcoming star of the New York Yankees, recently signed a one-year contract for $10 million. Perhaps he's thinking in terms of $20 million for the following year. Sammy Sosa recently informed his team, the Chicago Cubs, that when his contract is up, and he is then eligible for 'free-agency' in 2001, his asking price would be $160 million. (The number of contract years wasn't expressed.)

Where does all this end? What about the price paid to the business owner who assumes all (or at least the significant portion of) the risk, and is also responsible for paying commensurate pay and benefits to his "extended family - his or her employees for their quality work? Would he ask his customers to pay him $160 million next year because he had a good last year? I think not. So, the obvious conclusion, short of the Silicon Valley stock option game, is to calibrate the supply and demand curve of compensation for the small business owner and his/her employees, so they can understand the issues that are involved, and feel justly rewarded.

What constitutes 'good' pay? The first element is basic (base) pay. All employees generally identify with this critical component. We define it as, " a fair and equitable day's pay for a job well done." NOTE: Not for a fair day's work, as this leads to something less than high quality performance. Average performance yields so-so quality, and in today's competitive world, so-so quality/performance is a preamble for "let's get another supplier". Base pay, properly earned, should provide a meaningful standard of living for the employee. Base pay will not make any employee "rich", (with a tip of the hat to the extremely generous pay given to Jeter and others of similar stature.)

The base pay should be competitive within your locale (region) and within your general industry. Otherwise, you, the employer will train the worker and lose them to your competitors, perhaps in a different industry. Very importantly, you must be able to afford to pay the "going rate". After all, you're a business not a charitable foundation. In most businesses, salary, wages and benefits constitute more than1/2 of the total cost of producing the end product. Therefore, the employer should endeavor to spend his/her money wisely.

The second element is broadly defined as "incentive compensation". This is not a new term or concept, as implied in read recent articles that you might have read. However, they are more widely used in both design and down through many levels of employee groups who have not been eligible for such incentives before. In my experience, too many employers have misunderstood the mix of total compensation in their design of this pay system (that is, the marriage of base pay and incentive pay). What seems to be happening is that base pay should be reduced, or held at current levels with a "carrot" available to increase the employee's paycheck through incentives. In this way, the employer keeps his/her base wages level, and the employee can maximize his/her earning potential. In other words, let the employee "earn" his/her own shortfall in base pay.

But, I have a different perspective. Base pay, I believe, serves a different purpose; and, that is to provide adequate and competitive earnings to satisfy a reasonable standard-of-living. Therefore, the design of a strong pay plan is to maintain a meaningful and fair base pay, and provide sufficient incentives that adds income for the employer and employee. Incentive pay should be an additive to base pay, not in partial place of it. If quality is your business driver, then reward quality based on exceptional performance.

Because of newer pay designs recently, gains for the employer and employee are now presented in terms of cash bonuses, stock units, deferred compensation arrangements, stock options, and in other various combinations. Good compensation analysis and design is required to properly balance the pay equation.

In closing, one reminder-job satisfaction is the key to employee retention. Base pay concerns are not even among the top three reasons that employees leave their jobs. This has been borne out in a number of studies. However, the employer gains significant credit when base pay and enhanced earnings potentials are well designed and available to employees. It is the signal to employees that the employer has created a structure of recognition and integrity in dealing with his/her business associates-the one's most responsible for producing the high quality products that the market place demands.

David Merrill

Brixton Associates brixtondwm@yahoo.com

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