The Advantages of a Two-component Approach to Compensation

May 1, 1993
The two-component approach to delivering pay combines lump-sum bonuses, which recognize annual achievements, with base-salary increases, which recognize lasting contributions to the company. Such an approach to compensation offers the following powerful business advantages to companies:

  1. Reducing fixed payroll expenses.
    Lowering base-salary increases will reduce the fixed-expense portion of total pay. This will make companies better able to tie total pay levels to their ability to pay. In a profitable year, companies can fund large lump-sum pools. In lean years they can fund smaller pools. These actions can be taken without fear of the long-range business consequences that variant salary-increase pools can cause.

  2. Reducing benefit costs.
    Many benefits are tied to the base-salary levels of employees (life insurance, disability, retirement and so on). To the extent that base-salary levels are reduced, these benefit costs also are reduced. (Companies can choose to offset the benefit reduction to employees by modifying the basis for benefits or offering larger lump-sum bonus pools.)

  3. Supporting employee-development initiatives.
    Under the two-component pay program, the primary use of base-salary increases will be to reward employee development.

  4. Providing annual motivational rewards.
    To the extent that companies reduce base-salary increases, they can fund whopping lump-sum bonus pools that will capture the attention of even the most apathetic employee.

Personnel Journal, May 1993, Vol. 72, No. 5, p. 158.