Shaping the compensation structure

It is a widely held notion that entrepreneurs do not have a formal compensation structure. They do have one and, in fact, many enterprises can benefit from using an entrepreneurial compensation structure.

Compensation structure is entrepreneurial because the amount taken home is not a defined fixed amount that is expected to automatically increase every year. Rather, the amount changes and is directly dependent on what the individual does.

Recognize competence

Competence is what the individual is able to do, given a defined length of time. As such, there are two variables that define competence: the task to be done and the length of time it take the individual to do the task. For example, anybody can use the computer key board to type a letter but it is a different story when a person can type over 50 words per minute, net of mistakes.

Competence is the ability to do the task correctly at a given length of time. A person can operate a particular computer software, but a person who knows all the short-cut commands and, therefore, works faster with the software is more competent.

One dimension of competence is the ability to do a task. The other dimension is the time it takes to do the task, net of errors. The less time it takes, the more competent.

Another dimension is the number of tasks that a person can do. It may happen that a person can do several tasks but has different levels of speed in accomplishing the tasks correctly. A person can be recognized for the number of tasks that he/she can do and the speed at which the tasks are done correctly.

For purposes of recognition in the entrepreneurial salary structure, it does not matter if the person uses the competencies possessed. What is recognized is the possession. The use of the competence is an assignment issue and is not in the hands of the employee.

The critical issue in recognizing competence is : How does one find out if the competencies exist and, eventually, that they still exist? It is suggested that something similar to a trade test be given regularly. These tests will provide information as to whether the person still has the competence. Operationally, the person can be given a basic take-home pay for having the minimum competence. And, as the person improves on a current competency (improving time and accuracy) or acquires other competencies, additional allowances are granted. Of course, as the competencies are lost, it follows that the allowances are also lost.

Under this system, it is incumbent on the enterprise to test regularly for competence as well as provide training opportunities for people to improve and/or acquire desired competencies. The desired competencies are those that will give the enterprise substantial strategic advantage.

What is envisioned as part of the take-home money of the employee is determined by the number of competencies and the level/s of competency a person has reached.

Recognize Loyalty

The other component of the take-home money is loyalty. This is easier to determine. It is an amount a person takes home for staying one more week, month, quarter, or year with the enterprise. It is a recognition of length of stay only or of one’s loyalty. It can be given as a lump-sum amount at the anniversary date of hiring. However, this does not consider competence, only loyalty.

What is envisioned is that part of the take-home money of employee is determined by the number of years the person has stayed with the company.

Recognize Performance

The last component is performance. This is the result of the use of the competencies earlier recognized. This part of the take-home money takes note of the contribution of the person to the objectives of the enterprise. There will be recognition for not meeting the minimum, for meeting the minimum, and for surpassing the minimum. This implies that each person in the enterprise will have a measurable performance outcome in relation to the enterprise key result areas and performance indicators.

The entrepreneurs must be able to "delegate" the performance indicators to individuals and teams of the enterprise. Teams that are able to meet and even exceed their measurable performance will have to be recognized differently. This component of the take-home money puts the outcome in the hands of the employee.

What is envisioned is that part of the take-home money of the employee is determined by the performance against predetermined and measurable outcomes.

What is it an entrepreneurial compensation system?

The traditional compensation structure does not clearly differentiate among competence, loyalty, and performance. In the traditional compensation system, take-home money is expected by the employee to increase annually with inflation.

The entrepreneurial compensation system structures persons to act in an entrepreneurial manner. The take-home money is not a function of time spent in the enterprise. It is a function of the desire of the person to align self-improvement with the desired improvement of the enterprise. It is a function of the loyalty of the person to the enterprise. It is a function of the alignment of individual/team performance to enterprise performance.

These are the very three things entrepreneurs expect of themselves and also of the people who work for them. In fact, these are the three things that will make the individuals in the organization become the best persons they can be and, thus, contribute to making the enterprise become the best it can be. After all, entrepreneuring is about making individuals and the enterprise the best!

(Alejandrino Ferreria is the dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further comments and inquiries, you may contact him at: [email protected]. Published "Entrepreneur’s Helpline" columns can be viewed on the AIM website at www.aim.edu.ph).