What Is the Best Compensation Model?
Developing the compensation package of wages, benefits, and incentives is one of the most complex series of decisions any new company will face.
Model Compensation: Individually-based, global standard and global standard with localization.
Total Package: Beyond wages and benefits, how will other incentives be included (if any)?
Figuring the Cost: Work of contracted employees is to set a budget rather than set a cost.
Developing the compensation package of wages, benefits, and incentives is one of the most complex series of decisions any new company will face. Before you can answer the broader question of, "what compensation model is right for my company?", there are many smaller points to consider.
How will I recruit the best workers? How will our operations scale? What talent do we need? How will they work together remotely?
While there is literally an infinite number of ways you can design your compensation model, there are ways of organizing your choices to make them simpler. You will be constrained by competitiveness and the needs of your key talent, so the challenge is not as daunting as it seems at first. But it is critical that you choose your compensation models so that the total package of wages and benefits will meet your needs now and for the foreseeable future.
Elements of Compensation
Your total compensation package is made up of four broad categories:
- Wages paid directly to workers
- Benefits (e.g., health care)
- Incentive pay (should you decide to have any)
- Taxes or other liabilities accrued
Whether you choose to hire your workers as direct employees or as contractors, or a mix of both, the compensation model should apply in all cases. It is always important to note any additional liabilities such as taxes, insurance, or pension contributions which might arise either now or in the future based on your decisions.
Benefits are going to be heavily determined by applicable local laws and customs. For example, in the United States, any employee working over 35 hours per week must be provided with a health care plan. This is also true in many nations, as are pensions and other forms of insurance. It is also common to include premiums such as worker’s compensation insurance, as required by law to the overall package.
Some of these requirements do not influence your competitive position or ability to keep your team happy, but are simply overhead. They are still a vital part of the package that has to be considered.
Three Ways to Model Compensation
When setting your compensation package, there are three traditional approaches. Each has their own advantages and disadvantages, which will be discussed in detail. These are:
- One-on-one (individually based)
- Global standard (role-based)
- Global standard with localization
Individually Based Compensation
In this model, each employee or contractor is compensated with their own package based on their ability to negotiate and their skills.
Advantages: The total compensation package can be customized to suit each employees' needs based on where they are in life, making it more attractive for top talent.
Disadvantages: The lack of a team or skill-based approach makes transparency much more difficult and potentially troublesome.
Global Standard Compensation
In this approach, each employee or contractor is paid a salary based on a competitive analysis of their role and skill set. Everyone with the same job description and role is paid the same.
Advantages: Encourages team behavior and transparency. Is usually regarded as “fair.”
Disadvantages: Inflexible for many employees. May also include different benefits packages for some remote employees based on local laws.
Global Standard with Localization
This model sets salaries based on competitive analysis, but adjusts for remote employees based on the cost of living where they are located. For example, an employee in New York, San Francisco, or Shanghai will be paid more than one in a rural area according to a formula.
Advantages: Always matches competitive expectations for top talent. Increases flexibility for global recruiting.
Disadvantages: Can only scale up when someone moves, usually not legal to scale down if they leave the city. This model can also become complex based on how much localization is necessary and how many different locations you need to manage.
The Total Package
It is also important to consider how incentives might be included, beyond wages and benefits. For example, will the incentives be given out on a team basis or based on individual performance? Generally, the overall design of the package based on the three models described above will probably determine how incentives for performance will be given if they are to be a part of the package.
Start-up companies usually prefer a team based approach at all times, as it encourages working together and getting the job done. This is also most useful in a rapidly changing environment with flexible job descriptions. For this reason, even with salaries and benefits negotiated one-on-one, you may choose to have a team-based incentive program.
Figuring the Cost
An approach that makes sense for many companies operating with a global network of contracted employees is to set a budget rather than set a cost. In some cases, an employee will receive more in benefits than in salary based on their needs or local laws.
This kind of flexibility can be very good for both parties. It fixes the employee cost and becomes easier to scale as needed. It also means that their individual needs can be met. This approach makes the global standard or role based compensation models much more attractive.
Which Model Is the Best?
There is no “best” model for a company. If your company hires a lot of people with the same skill or role, it is usually fair to have a global standard salary that everyone can depend on. If every single role is different, there is certainly room for negotiation, especially since it is difficult to fully calculate the current competitive standard for every skill set.
If all of your employees are in the same nation, a global standard is also much simpler to set. If you are recruiting talent globally, adjustments for local costs will have to be considered.
In the end, a decision has to be made. From that, the choices become limited and decisions about how the company will scale are mostly set. It is important to understand all of these models from the start to make a decision that you know you can live with now, and in the future.