I’ve been doing a series of talks on compensation and I usually start them off by asking the audience, “Why do you pay people?” or put another way, “Why do people want to get paid to come to work?” There are the obvious reasons; they want to feed their families, they don’t like work as much as fishing, so they have to have a reason not to go fishing. But I want to go beyond that. Why do people want to get paid more than other people? Why do employees want to make more money than they need to feed their families? Again there are reasons of comfort; a nicer house, send their kids to college, etc. Sooner or later I get some more interesting answers, “because they create value – so I want to share some of that value back to them”, or “because it’s a measuring stick – the one who creates the most value gets paid more”. This is where we get to the core of what compensation is all about, it’s about recognition. People work to get paid so that they can feed their family, and take care of their kids –  but they work harder to get a nicer house, or car; to take a better vacation or buy a cottage. Those are all symbols of status that say to the world, “I’m worth something, what I produce is valuable.” Once we’ve meet the basic needs of food, shelter, warmth, etc. then humans have a desire to produce something of worth and be recognized for that. Looked at in this way salary, bonus and other compensation is just a big recognition program, a way to say “Thank You. The biggest and most expensive recognition program that you have.

So if the primary purpose of compensation is to recognize people, to thank them for creating value in your company, what does that tell us about our compensation program?

1. We’d better be recognizing the right behaviors. When people earn more we are rewarding a set of behaviors – Are we recognizing behaviors that we want to see reproduced?
2. Recognition is most powerful when it’s tied to actions that people are taking but salary is somewhat different.  We set salary levels not so much because of what someone does, as who someone is. We don’t want to have to pay-per-decision, we want to set a salary based on what we expect will be their day-in-day-out performance. This is why it’s essential that salary be reviewed regularly. Is this who I thought they were? Is it what we need in our organization now and for the foreseeable future?
3. If salary is a recognition program, are there other ways that we can recognize people that will help us to retain people who even if we aren’t paying top dollar? If we do a good job creating status with the kind of work we do, or other rewards will that make up for some discrepancy in salary?

Thinking about compensation as recognition can help us to stay on the same page with our people, can help us to design compensation that makes people feel great and doesn’t cost the company an arm and a leg.

How do you view compensation? What do you do to recognize your key people?

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Brad Farris is a small business advisor with Anchor Advisors, Ltd. in Chicago, Il. Since 2001 Anchor Advisors has been helping creative professional firms to grow, by helping them clarify their purpose, get the most from their people, keep their eye on key performance measures, and implement consistent processes. Brad is also the author of The Business Owner’s Champion: 6 Practices to Build your Nerve and your Business.