10Choosing the Right Elements: Build a Compensation Plan
“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”
—Albert Einstein
In this chapter, we explore in detail two key elements that can be included in a compensation plan: base pay and bonus compensation. Makes sense we’d choose these two elements, right? As we discuss them, however, we challenge you to consider beforehand the many things about each of these elements that firms often find problematic. We also look at how to go about administering the plan.
Base Pay
Base pay is where a compensation plan starts. Base pay can best be defined as pay for work, excluding any additional bonuses, payments, or allowances. Setting base pay for employees is easier than for owners. Robert Half’s annual salary survey is an excellent place to obtain salary information for employees. Gathering base pay information for owners is another story. For many firms, there is no rationale for how much should be paid to owners. It’s fair that owners should be paid more than nonowners (reward for taking the risk of ownership), but there is usually no system to determine the base value of owner positions.
Before we provide ideas on setting owners’ base pay, we ask you to consider what you want to achieve with your firm’s base pay program. Please keep in mind there are no correct or incorrect answers in this exercise—just answers. Please see exhibit 10-1 for an exercise to help you.
Base pay ...
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