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An important part of budgeting is planning for compensation increases, bonuses and incentives for you and your team. Your staff wants some insight into their earning potential and you shouldn’t put this off. (Jane_Kelly/Getty Images/iStockphoto)
An important part of budgeting is planning for compensation increases, bonuses and incentives for you and your team. Your staff wants some insight into their earning potential and you shouldn’t put this off. (Jane_Kelly/Getty Images/iStockphoto)

Chris Griffiths

How to juggle raises, bonuses and incentives with ease Add to ...

Have a question about a small business topic? Let our resident expert Chris Griffiths share his expertise. E-mail your questions to smallbusiness@globeandmail.com. Confidentiality ensured.

It’s a new year and most small business owners I know are excited about building upon a decent 2013 performance.

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If you haven’t already, I urge you to create a budget for 2014 that will allow you to articulate your goals and expectations from your team for 2014. It’s not enough to say you need to do better or lower costs or find new customers. It needs to be detailed enough that everyone, including yourself, understands how your targets for the new year translate into the work you need to do today, next week and next quarter.

An important part of budgeting is planning for compensation increases, bonuses and incentives for you and your team. Your staff wants some insight into their earning potential and you shouldn’t put this off.

If you, the small business owner, aren’t willing to invest some time in calculating and communicating what your team will earn in the coming year, you’ll likely end up with poor morale and a lack of enthusiasm for going the extra mile for you and your company.

In my opinion, if your company grew, your team’s compensation needs to grow as well. Of course you may have missed some targets. Maybe your net profit didn’t hit your goal goal despite strong sales growth, for example. But your employees won’t want to be punished for things out of their control.

I’ve been there, believe me. I once had a compensation plan based on a piece of business for which I had little direct influence. It was unsustainable and demoralizing as I woke up every morning not knowing if my efforts would actually be implemented and assist in the growth of the business, or myself for that matter.

Employers who think that employees are happy simply to be getting a pay cheque need to think again. Your staff wants to know that they’re contributing to something bigger than themselves and that their work has value. Ignoring these facts will lead to clock-punching employees who work for you because they have to, not because they want to.

The difference in the quality of work you receive from an employee who is engaged and in tune with the business’s goals, versus one who who isn’t, is night and day.

I believe in using a range of compensation increases based on performance. Often a low of 2 to 3 per cent up to a high of 7 to 8 per cent works best. Those employees whose work was satisfactory achieve on the low end of the scale. Those who excel and go above and beyond the call of duty receive an increase towards the high end of the scale. The very top end is reserved for only the most exceptional of situations (i.e. the top one or two employees).

By recognizing a cost of living increase on the low end, and rewarding the above average workers on the high end, you’re setting an example as to what can be achieved for those who put their minds to it.

Ignoring annual compensation increases creates a backlog of expectations. That is why setting expectations, planning and budgeting is so important. It will be very hard to skip employee compensation increases for a couple of years and then offer a few percent in the fourth year, for example. At that point, a low raise is insulting and trying for a higher raise will be harder for the business to absorb.

Less more often is what needs to be done for compensation adjustments. In addition, I also believe in using shorter term bonuses and incentives to drive focus and directions within the year. You can read more about my philosophies towards these tools in a previous column.

The key is to include all types of compensation into your budget so you are financially prepared to deliver on them. To be safe, you may want to budget your salary increases on last year’s business performance and the incentives on targets achieved this year. That way, you don’t have to depend on a future business growth to pay for a current obligation.

No matter how you go about it, keep a strong line of communication open with your staff and build a plan that you can execute without last-minute negotiations from employees or managers.

Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.

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