INKISH.NEWS -

As promised a couple of weeks ago, we are going to look into salaries, bonuses, and incentives in the following weeks. This subject isn't easy to discuss since we have no interest in discussing the actual sizes of the salaries, the bonuses and the incentives, but more the mechanisms behind. However, the size of an incentive obviously, plays a role, so we have to talk about this in broad terms.

A good place to start talking about salaries and how these compensate your work is talking about professional sports professionals, musicians, and actors.

To play a football match, record an album, or to act in a film requires a certain time, and in most other positions you would be compensated on the number of hours you work or this is at least how most employees see it. The correct way to judge your salary is the relation between your service and the value you bring to your company. No employer would pay you more than your value, and how-ever hard it can sound, this put the difference in salaries in perspective from the unemployed to the top-executives or sports stars, musicians or actors. In the US, the average annual salary for an actor is $50.000. If you look at the highest-paid actors in the world, the reason why they are paid more than the average salary is, of course; they bring more value to the film companies who invested in the film.

People who know their value will often be compensated higher than people who don't know. If you have a large customer portfolio, your value is often perceived higher. If you have a larger responsibility, i.e., managing other people, your value can also be perceived higher, and so on. Whether this is true can be very difficult to identify and prove. However, the relation between value and compensation is important to understand.

In the past many years, endless discussions about equal pay for equal work has been a political mantra. Of course, you can always argue that people with the same education, same title, same responsibility, etc. should have the same compensation - but isn't that more of a political wish-thinking, since the real compensation is what value you bring to your company? You can argue that if legislation requires equal wages as just described, most employers would most likely get rid of the employees who don't perform - OR chose to compensate in different ways.

Bonuses and incentives are among the tools in the toolbox, and yes, of course. A bonus or incentive can be the same, but can also very different. Some companies offer their employees an annual bonus based on the company's overall performance - IKEA is an example. Incentives are more tools used to push sales and to encourage salespeople to deliver more. Incentives and bonuses can also be used to give the employee a share of the value-creation. The reason for sharing the risk can be an advantage for the company as well as for the employee. However, the employee often has a higher risk, since he/she rarely influences product development, marketing, and other activities that position the product in the market.

Salaries are very different from country to country. The measures are often very comparable, but taxes, overhead cost, general labour cost, etc., influence the actual salary. However, there is one measure that is used by all companies, and that is productivity. Productivity is how much value employees generate. If your revenue is 3.000.000€ and you employ 50 people, your productivity would be 60.000€ per employee. If you compare this to your closest competitor, then you will get an idea about how effective you are against each other. Productivity is very different from country to country since the basic structures are very different. The difference in productivity often explains the technology gaps you see. If labour cost is low the level of automation and implementation of the latest technology is often less developed. If you, i.e. take a look at the printing industry in Norway. Norway is one of the most expensive countries in the world, so productivity needs to be high (meaning high revenue generated by as few people as possible). Often you will find equipment among the most modern and most automated.

Salespeople here have to sell more expensive than the same products would cost in countries where overhead costs are lower. Also, taxes and fixed cost in Norway are higher than in most other countries, so I believe this creates a less dynamic market, and therefore also salaries that in general are higher, and maybe even often without incentives on top. In countries like the US where labour cost, the dynamics of the labour force, and a possibly more competitive market, you will see more salespeople employed with a larger part of their compensation as incentives.

Understanding the value to compensation ratio should also lead to a couple of considerations. If you are a good salesperson, you don't necessarily is a good sales manager. If you are a good sales manager, you don't necessarily become a good mid-manager, etc. Too many printing companies see higher positions in a company as a reward that will lead to better results. Whether this is the case or not, I will leave up to you to judge!

A better reward could be a higher salary, better compensation in other ways, and under all circumstances to a discussion about what qualifications you expect from people working in your company.

In the next article, we will talk about compensation of management and why measures for the management can be extremely difficult. Stay tuned!

May 10, 2020

Author: Morten B. Reitoft