Devoted to Managers and those that seek to improve their management skills

Industry Week has a good article on their web site called "Winning Compensation Models: Partnering With Employees To Create Performance Gains." It offers five rules to consider when compensating employees. Let's talk about the first one concerning base pay increases.

From the business side of it, you've got to understand the consequences that come about from offering base pay increases and one-time incentive bonuses.

When you offer base pay increases for good years, it has the potential to really hurt the business. Taking the example of an employee making $60,000 a year and you give them a 10 percent base pay raise for the year's results. If they stick around with the company for anothe 10 years, you've in reality given them a $60,000 raise over the duration of their stay with the company. That doesn't include anymore raises or increases in benefits etc.

From the employees point of view, think of the time when you had a great year and you were maybe offered a base pay increase of a dollar an hour. What's the first thing an employee does? In their mind they say, "a dollar an hour times 40 hours equals a whopping $40 a week ... it's an insult rather than a reward - and that doesn't even include taxes and the rest being taken out.

But when you give them say a $3,000 bonus for a great personal year, it means something to them simply because of the psychology of the number involved.

Now when you consider this in the light of lottery winners, it helps to understand how employees take things. When somebody wins the lottery, they're basically winning an annuity. Most of the time they are offered a one-time, much lower payment in place of the long-term monthly payout. Almost every single one of the winners take the one-time offer. Why? It's all in the way the larger numbers make them feel.

So from a workers standpoint, the idea of getting a lump payout is much more satisfying than receiving a much smaller hourly figure.

Even if you tried to sell them on the longevity benefit they would receive, the majority of people aren't willing to experience deferred gratification; they always want it now. The reasons why lump sum bonuses are much more rewarding to them than stretched out payments.

The parameters we're talking about here is the attainment of short-term goals. The base pay increases should be connected to other areas beyond the scope of this post.

So the thing to remember is that short-term goals being met should equal a one-time bonus payment. It's better both for the company and the worker.