Picking the Right Compensation Plan for Your Employees
Posted on 13 Sep 2019
It’s fantasy football season and leagues all around the country have held their drafts. In one type of draft each fantasy team starts out with a budget and bids on NFL players to build the best team with limited resources. This fantasy game parallels the real life struggles that small business owners face. They work with their own “salary caps” yet strive to attract the best employees. A compounding issue is the historically low unemployment rates in 2019. In July the rate was 3.7% compared to 9.6% just 10 years ago. Since finding good workers is such a challenge, what is the most strategic way to pay them? How can employers leverage the different compensation plans to build their teams?
How Do You Pay Your Employees?
A lot rides on the compensation plan you choose for your team. For non-salaried employees, there are a few options:
By the hour
Piecemeal/piece rate/flat rate
A hybrid model
Which is the most efficient and productive compensation plan? Does it properly motivate employees in ways that positively impact your bottom line?
Real-life Factors That Play Into Different Compensation Plans
This is a big decision that touches many things beyond the piggy bank. So much is wrapped up in it:
Labor law compliance
Company culture and morale
Ease of bookkeeping
Inside the Playbook of Each Compensation Plan
By the Hour
Hourly pay is straight forward. Pay an hourly wage for time worked.
Easy to track and understand by both the employer and employee.
Labor law compliance is simple to maintain.
Employees know their schedules and how much their paychecks will be each week.
Overtime is easy to track.
It possibly rewards employees for taking their time to do thorough work.
Labor costs are not fixed. You may have job budgets set, but an employee can work over the budgeted hours. To mitigate this issue, a good practice is to use an automated timekeeping system that has budget reports and scheduled vs. actual reports.
Hourly pay may encourage employees to milk the clock with negligible improvements to quality.
Capable employees are not rewarded for finding innovative ways to worker faster and more efficiently while maintaining high work quality.
Employees are paid a percentage of the sales for each job. For example, the cleaning job takes in $50 per clean. Your commission structure may be to pay 50% to your cleaner (or it could vary based on employee experience). If 2 cleaners are on the job, it could be a 27/23% split depending upon experience.
Employees are rewarded to work efficiently and quickly to get more jobs done. More jobs = more money.
Employees are encouraged to discover innovative ways to increase production without sacrificing quality.
Costs are fixed. For a janitorial company, building X costs a fixed percentage of your revenue, regardless of the time spent.
Quality control must be strictly monitored to ensure that higher quantity doesn’t happen at the expense of quality (but you already stay on top of QC, right?)
Bookkeeping is more complicated. Each job could pay the same percentage for each employee, but the revenue number for each job could be different, so the amount paid to the employee is different for each job.
You’re not off the hook with tracking time worked. The Fair Labor Standards Act (FLSA) requires that employees be paid at least minimum wage each week. Divide each employee’s total commissions by hours worked. If that figure doesn’t reach your State’s minimum wage you have to make up the difference. In essence, you will have to keep 2 sets of books – one to track commissions and another one to track the time. This is also true for overtime. Any OT hours must be compensated at FLSA OT rates (or your State’s OT rate). According to this article, “Failure to keep track of worker hours and to pay them according to the rules leaves you open (and largely defenseless) to worker claims that you did not pay them (a) the minimum wage, (b) overtime or (c) both. Those claims will likely spark an audit by an investigator from the Wage & Hour Division, an experience that leaves many employers yearning for the peace and tranquility of an IRS examination.”
Piecemeal/Piece Rate/Flat Rate
This compensation plan pays an employee a set unit price per project/piece completed. A roofer could make x dollars per square of shingles installed. A mechanic could make x dollars for each car serviced. A cleaner makes $20 per office cleaned. The advantages/disadvantages are similar to commission pay.
Costs are fixed.
It motivates employees to find innovative ways to increase production to make more money.
Slower, less efficient employees are easily identifiable.
The potential of higher profits. Efficient employees drive labor unit costs down, resulting in higher profits. In this study about vineyard pruning performance, the man hours per acre for hourly pay employees was 26, while the man hours for piece rate workers was 19. That’s a 27% savings in time. The cost per acre was $158 for hourly and $115 for piece rate. This also represents a 27% savings in labor dollars.
Efficient employees can make more money than if paid hourly. According to the same vineyard study, piece rate employees made 10% more than their hourly rate counterparts. And 98% of growers surveyed reported being satisfied or very satisfied with the quality of the pruning work.
Quality can suffer.
2 sets of books are required to comply with labor laws in regards to the FLSA’s minimum wage and overtime requirements.
Employees have to trust that the piece rate allows them the opportunity to make more than the hourly rate. In this study of farm workers, many felt that employers tried to manipulate the piece rate to make it work out to no more than hourly pay.
May not appeal to older workers who like the pace of hourly pay.
A fourth compensation plan is a hybrid model. Employees are paid an hourly rate for a set number of hours at each job, regardless how long a job takes, plus performance bonuses. An employee who produces more volume at a high quality gets rewarded. The bonuses can be paid on weekly, monthly or quarterly intervals (or all 3 for varying incentives). The bonuses can be based on customer feedback and/or quality control inspections, as well as the number of jobs done. This model motivates employees who are willing to hustle, while it helps employers to directly tie labor costs to production. We won’t break down the advantages and disadvantages with this model as they are all covered above, but it still represents a bookkeeping challenge for the employer. The employers must still track time to comply with FLSA minimum wage and OT requirements.
How you choose to pay your employees can give you a strategic edge in trying to attract and hire the best workers. In our low unemployment economy, you need every advantage you can get. Also, how you pay your hourly employees is something that we are greatly interested in. If our online time card system can help make your payroll day easier and maximize profits while increasing employee retention, we want to know what we can do. We welcome you to share your thoughts with us on this matter on Facebook.
Whichever compensation plan you use, carefully tracking employee time is imperative in this non-fantasy world for compliance to FLSA minimum wage and overtime requirements. We can definitely help you automate the time collection process. Give us a shot for free for 30 days.