Common Mistakes CEOs Make With Employee Compensation (And How to Avoid Them)

An employee discussing compensation with his boss

CEO’s and managers of small businesses, especially those newly minted, can make several common mistakes when it comes to employee compensation. CEOs naturally want to attract strong talent to their companies, and in order to do it, they often say “yes” to the demands of their prized candidates. Unfortunately, those “yesses” may amount to empty promises as many times they can be unrealistic, poorly communicated, ambiguous, or simply not feasible.

Mistake #1: Verbal Agreements To Multiple Benefits Packages

In the early days of a business, it’s fairly easy to manage individualized employee compensation packages. However, many CEOs often do not consider how business growth will affect those plans. Typically, individual agreements are verbal, and when they are written, the documentation many times, can disappear over time.

A lack of documentation leaves employee compensation open to interpretation. For example, an employee could claim she was promised three weeks’ vacation or a raise after a certain period of time. If there are no supporting documents, the company may find itself in an unnecessary dispute over the claim. For most, it is virtually impossible to remember what each individual was promised from a verbal agreement, and the more employees the company adds, the more complicated the situation becomes.

Mistake #2: Generosity That’s Impossible To Scale

The other consequence of verbally making individualized compensation agreements is the lack of scalability. As the company grows, it can be fiscally irresponsible to generously award compensation and benefits without critically assessing the organization’s current financial position – but many who are desperate to attract top talent might not think of that as they make promises. The bigger the organization, the more expensive benefits and perks become, which is what we all need to be cognizant of.

Mistake #3: Multiple Benefits Packages Lead To Employee Unrest

Ideally, employers would prefer if employees did not discuss salary and benefits with coworkers, however, it’s impossible to stop and it’s illegal to prevent or discourage employees from discussing their own compensation. Conversations about salary and benefits will happen, and there is no realistic way to prevent a team member from discovering that someone who does the exact same job makes more money or receives more paid time off than he or she does.

As soon as one employee discovers another’s “sweeter deal,” it sets the office gossip wheels in motion. It generally doesn’t take long for the entire workforce to start comparing their individual compensation packages, which leads to low morale and high dissatisfaction. At minimum, that dissatisfaction disrupts productivity. At its worst, it can mean losing talent. While CEOs can never expect to make everyone happy all of the time, they can prevent this uncomfortable scenario by offering consistent employee compensation packages.

Mistake #4 Forgoing HR: Who Maintains Consistency And Compliance?

These mistakes aren’t intentional on the CEO’s part. Quite the contrary. Small business owners are simply unaware of the intricate and comprehensive details of employee compensation because they are not versed in this realm.

Many CEOs of small businesses and startups put off hiring an HR manager, but as the company grows, it’s essential to have someone who can help sort through and manage company compensation to ensure that employee compensation is not only consistent, but also legally compliant. The laws vary among different states when it comes to paid time off and other benefits, and the only way to keep everything organized, manageable and legal is to have a competent HR professional with relevant experience in this area.

The ideal professional knows what the business can realistically offer and what can be accomplished within the organization’s budget. They will look at the company’s size, its finances, its long-term goals, and what type of talent the company hopes to attract. From there, they can help develop an ideal total compensation package that will attract and retain its desired workforce.

Employee compensation can be extremely complicated to manage, especially as the company grows. With a little bit of help and a commitment to consistency, CEOs can avoid these common mistakes and the disruptive situations they cause.

Eileen Levitt

Eileen Levitt

As Founder and President of The HR Team, Eileen Levitt attains great personal satisfaction in helping small, mid-size, and emerging companies focus on what they do best: directing business growth and profitability.
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