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Employee Compensation: Handling Reviews & Raises (Article)

As a business owner or manager, one of the most difficult things to oversee is compensation and employee expectations at review time.
Most companies follow a typical approach: a review after an employee’s first six months, with annual reviews every year after that. Along with the review usually comes a bump in an employees’ base pay and change in role or responsibility.
This typical approach can introduce unexpected problems if you aren’t careful.
For example, If you run a consultancy or seasonal business, your business experiences ebbs and flows in the amount of work. Inevitably, employee review times fall during the slowest periods of the year because that’s when you had time to bring a new employee onboard.

This causes several issues. As a business owner, it’s difficult to increase overhead at times when business is slow. Even if you know you’re just in the down part of a regular business cycle, it still makes your judgment more conservative. And once a raise is in place, business would inevitably heat up, and an employee wouldn’t experience a financial impact that was in sync with his harder-working performance. He didn’t directly feel a reward for his work.

To resolve these problems, tie a large portion of our employees’ compensation to the performance of the company.

A couple of ways to do that:

1. Conduct quarterly reviews that include peer feedback.

2. As a company, we set a revenue target each quarter.

3. We take part of the money we had budgeted for raises and instead pay it out on a quarterly basis tied to company performance.

4. Each employee is given a goal that is a percentage (about 10%) of his or her salary.

5. As the company achieves the quarterly goal, each employee can achieve the equal percentage of his or her individual target.

6. We allow the achievable percentage to rotate above 100% if the company outperforms expectations for a given quarter.

Though these tactics were hard to adjust to at first–not having a known dollar “number” was frightening–we put the program in place. And it has been very successful. Conversations about compensation are now rare at User Insight, and only when an employee takes on a substantial new level of responsibility.

We’ve had times when bonuses have been paid out at more than 150% of expectation, but that worked because the company was doing well and employees had stepped up to deliver the work that was needed. Likewise, when the company is not mapping to goal, we save money on overhead.


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The quarterly reviews have also been very helpful. The results allow us to look at the organization overall on a more frequent basis, determine what’s going well, and discover ways to improve. We have a better understanding of how we’re doing as a company. We regularly release the percentage of revenue target we have achieved, so employees know right away if we are ahead or behind.

The best thing that changed: Now everyone cheers when we sign a new deal.