Base salaries, by their nature, have the unique characteristic of mainly going up, rarely down (recent economic conditions notwithstanding). In practical terms, what this means is when you reward an employee for a good year you will still be paying for the good year 10 years from now, 15 years from now, or however long the employee remains with your company. The problem is even if they never have another good year you keep paying.
Therefore, we need to eliminate the notion that a “good year” triggers a base salary increase. Sounds like sacrilege, I know, but bear with me. Instead, we need to think in terms of knowledge, skills and abilities. Once an employee acquires knowledge, skills or abilities, s/he has them forever. So if you pay for those assets you're paying for something that won’t go away.
We all know people who have tremendous expertise but can’t get anything done. Similarly, we know people who achieve wonderful things with limited expertise. Therefore, it's clear that knowledge, skills and abilities don’t guarantee results.
WHEN TO GIVE BASE SALARY INCREASES
Below are examples of the typical knowledge, skills and abilities that once acquired remain with an employee and make them more valuable to an organization FOREVER. These are worth paying for through increased base salaries:
Ask yourself "For this job, what does an employee need to know to be successful?" The answer is what's worth paying for in a base salary. Of course, you can’t include everything, so the top 10-15 will suffice.
NOTE: Many of the examples above might frighten some people off. How, you might ask, can I determine a person’s flexibility or multicultural awareness? I'll say more about that at a later date, but you can check out this link for a quick overview.
WHEN TO PAY AN INCENTIVE (OR BONUS)
This is where you pay for results. Unlike base salaries that should be paid when an employee acquires KNOWLEDGE that is of value to the business, incentives (or bonuses) should be paid for OUTCOMES (that is, the results achieved using that knowledge). No results, no payout.
The beauty of incentives is you only pay for what you get, and unlike base salaries, once you pay for it you never have to pay for it again unless you get it again. What’s more, if you make a mistake and pay a bonus for the wrong reason you get to try again next year. With base salaries, you pay for your mistake forever.
Below are examples of RESULTS worthy of an incentive (or bonus) payout:
NOTE: These are generic categories and within each one literally dozens of more specific incentive plan measures could be created. For example, Satisfaction is a broad category that includes customer satisfaction, employee satisfaction, client satisfaction, vendor satisfaction, patient satisfaction, physician satisfaction, etc.
THE PERFECT PAY PLAN
It’s the old story – if all you have is a hammer, everything looks like a nail. Base salaries and incentives are two entirely different tools. Treat them as though they are one in the same and you’re likely to get screwed.