Compensation considerations: taxes & discretionary effort

During a very interesting exchange at a recent gathering of business professionals, a conversation around compensation and benefits practices of different firms arose.  We were talking about two specific firms that reward employees in different ways.

The first firm believed in cash compensation based on performance:  if you deliver X, then you receive Y.  Cash compensation is very high for this firm, but minimal additional benefits are paid to employees.

The second firm believed in lower cash compensation, but with a significant benefits package that included insurance, development opportunities, community involvement, and a generous retirement package.

Both firms are successful, and we pondered how the compensation philosophy affected the bottom line....


With pure cash compensation, there are two tax implications (generally speaking):  first, for every dollar of compensation the business incurs Fed/FICA/SUTA taxes; and if the compensation is paid as bonus, an additional tax is applied.A raft of benefits can still be expensed like compensation, but carries the additional benefit of tax avoidance for both the firm and the employee.  A component of this is realized through the lower negotiated cost of benefits, and the perception of value delivered through no-cost benefits like ancillary insurance, community events (okay, maybe a couple of t-shirts?), and recognition programs (again, okay - the cost of the paper to print?).  From the firm's perspective, there is also the realization that all benefits (i.e., tuition reimbursement) will not be leveraged by all employees.  Behaviorally speaking, the employees still perceive value because of the accessibility to the benefit.

Which path is right for your business?  The short answer is that it depends.  Sales organizations and functions usually fare better with a model that's close to pure cash compensation, and most other organizations will fare better with a nice benefits "hug" for employees.

I like the "hug" approach, because it drives employee satisfaction.  The more satisfaction an employee experiences, the more likely that employee is willing to deliver discretionary effort - that is, to go above and beyond the stated requirements for the job.  Broadly speaking, satisfied associates are more aligned with the firm, and deliver more than the job description.

It's all about the value proposition.  What are you giving your associates?  What are they getting, and what's their opportunity cost?

And what does that cost you?

-Bryan