The Dangers of Having No Compensation Plan

Do you live in fear of your employees comparing their pay rates?

Some companies have gone as far as barring employees from discussing pay with co-workers — enough, that there has been proposed legislation to ban this practice (and, it’s usually unlawful for employers to stop employees from discussing pay even today, under National Labor Relations Act provisions on “concerted actions”.)    But what’s the fear?

Too many small employers have no rhyme or reason to their compensation system.  Your employees work side by side, doing the same job, and yet have vastly different pay rates.  There’s always a reason — some negotiated for a better rate when they started, others were hired when you were desperate to find people, and still others came from an acquisition that paid its employees differently.  As the business owner, you may know all of these reasons in your head, but they’re a lousy answer when an employee comes to you and asks the dreaded question:

“Why does he make more than I do?”

What do you say?  “He was just hired at the right time” doesn’t really work, and “It doesn’t matter, just be happy and stop complaining” is a recipe for losing employees.

The best way to answer that question is to be proactive.  Even in a small workplace, peace and harmony will be easier to maintain if you have a compensation plan in place.  This plan should spell out:

  • What rate employees in each job start at? (make sure this is consistent with your industry!  It also need to align with minimum wage in the area where you operate)
  • How large an increase supervisors can give out, and when? (and give the some objective guidelines to work with as well)
  • What training or certifications will also result in an increase, and how much?

These numbers need to adjust every year, and implementing the plan will mean shifting some of your current employee pay around.  However, once this system is in place, you can drive morale and productivity in your organization by answering the question above with: “He makes more because he’s a more valuable employee, and here’s how you can get there.”


Not sure where to start with your plan?  That’s what we do; give OEM a call!

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