Creative compensation

It's important to give a lot of consideration to your business's compensation structure because it ultimately reflects how employees are valued.

Sarah L. Fogleman
Kansas State University.

When it comes to employee compensation, most managers are busy asking: "What do I have to pay to…?" That is not an easy question to answer. A better question might be: "What do I want my compensation package to say?"

Whether you realize it or not, it is already saying a lot. Child care and health benefits say that you value family. Giving longevity bonuses for employees on the anniversaries of their employment with you says that you value employees who stay with the business. Throwing a party at the end of your business's busy season lets the employees and their families know that you appreciate it when your people go the extra mile. No matter what compensation elements you use, they all carry a message.

That message is important. Compensation packages can be linked to business structure, employee recruitment, retention, motivation, performance, feedback and satisfaction. Compensation is typically among the first things potential employees consider when looking for employment. It is important, therefore, to give a lot of consideration to your business's compensation structure. After all, for employees, compensation is the equivalent not to how they are paid but, ultimately, to how they are valued.

What is a compensation package?

It's easy to think "dollars per hour" when thinking about compensation. Successful compensation packages, however, are more like a total rewards system, containing non-monetary, direct and indirect elements.

Non-Monetary Compensation can include any benefit an employee receives from an employer or job that does not involve tangible value. This includes career and social rewards such as job security, flexible hours and opportunity for growth, praise and recognition, task enjoyment and friendships.

Direct compensation is an employee's base wage. It can be an annual salary, hourly wage or any performance—based pay that an employee receives, such as profit-sharing bonuses.

Indirect Compensation is far more varied, including everything from legally required public protection programs such as Social Security to health insurance, retirement programs, paid leave, child care or housing.

Employers have a wide variety of compensation elements from which to choose. By combining many of these compensation alternatives, progressive mangers can create compensation packages that are as individual as the employees who receive them.

The general consensus of recent studies is that pay should be tied to performance to be effective. However, with traditional farming operations, that is not easily done. Business performance can be affected by many factors over which employees have no influence, specifically—weather. Successful managers must search for things employees influence and base performance objectives on these areas. Your operation may benefit from the following: tenure bonuses for long-time employees, equipment repair incentives to encourage good equipment maintenance, or bonuses for arriving to work on time.

The more production information data your business has, the easier this is to accomplish. Measures such as feed conversion rates, somatic cell count or mortality can offer great sources for performance incentives.

Direct Compensation Alternatives

  • Basic Pay: Cash wage paid to the employee. Because paying a wage is a standard practice, the competitive advantage can only come by paying a higher amount.
  • Incentive Pay: A bonus paid when specified performance objectives are met. May inspire employees to set and achieve a higher performance level and is an excellent motivator to accomplish farm goals.
  • Stock Options: A right to buy a piece of the business which may be given to an employee to reward excellent service. An employee who owns a share of the business, or just a few animals or acres, is far more likely to go the extra mile for the operation. For example, very few people leave their own gates open.
  • Bonuses: A gift given occasionally to reward exceptional performance or for special occasions. Bonuses can show an employer appreciates his/her employees and ensures that good performance or special events are rewarded. Some indirect compensation elements are required by law: social security, unemployment and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working mother may take a lower-paying job with flexible hours which will allow her to be home when her children get home from school. A recent graduate may be looking for stable work and also an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate different compensation elements.

In a tight labor market, indirect compensation becomes increasingly important. Businesses that cannot compete with high cash wages can offer very individualized alternatives that meet the needs of the people you want to employ. Such creative compensation alternatives are the small business's competitive advantage.

Indirect Compensation Alternatives

  • flexible working schedules
  • elder care
  • retirement programs
  • moving expenses
  • insurance (health, dental, eye)
  • subsidized housing
  • paid leave (sick/holiday/personal days)
  • subsidized utilities
  • tickets to events (ball games, concerts)
  • magazine subscriptions
  • boots and clothing
  • laundry service
  • company parties
  • use of farm trucks, machinery
  • farm produce/foods/meals
  • cellular phones/pagers
  • child care
  • use of farm pastures and gardens

Elements of a successful rewards system

  1. Non-monetary Compensation. Includes benefits that do not involve tangible value.
  2. Direct Compensation. Employee's base wage.
  3. Indirect Compensation. Everything from legally required programs to health insurance, retirement, housing, etc.

Determining the cash wage

Ask ten different people what a fair wage is and you'll get ten different answers. While there are no hard and fast rules in determining a fair wage, the importance of the task is obvious. Research according to Gregory Billikopf indicates that employees expect wages to 1) cover basic living expenses, 2) keep up with inflation, 3) provide some funds for savings or recreation, and 4) increase over time. Discussing wage expectations with employees can help determine what their compensation package should look like.

The first thing employers should consider when developing compensation packages is fairness. It is absolutely vital that businesses maintain internal and external equity. Internal equity refers to fairness between employees in the same business while external equity refers to relative wage fairness compared to wages with other farms or businesses. No matter the compensation level, if either internal or external equity is violated, a business will most likely experience employee dissatisfaction and employees with begin to balance their performance through a variety of ways ranging from decreased productivity to absenteeism and eventually to leaving the business.

So, what constitutes a fair wage? One approach to determining a fair wage is a market survey. These are typically fast and easy ways to establish compensation guidelines for many businesses. A few phone calls to other employees in similar businesses can determine the "market" value for a specific job. Unfortunately, this technique is not necessarily well suited for agricultural producers. An agricultural manager can do informal surveys of other agricultural producers to determine the "going rate" for labor or modify existing studies of non-agricultural businesses to compare employees not by job title but by skill sets. For example, operating a forklift in a factory and driving a tractor may require similar skills and, therefore, can be compensated similarly.

Broadbanding was used in a Cornell University study. Five competency levels were developed to classify employees according to three criteria: authority to make decisions, skill level and supervisory capacity. By using a competency scale, each employee can be cross-referenced by job title and competency level or studied solely within either category. Employees of similar skill levels or competency are taken together in compensation "bands" regardless of job title. These bands then compensate like employees at like rates across the entire organization and serve to maintain both internal and external equity.


Agricultural managers face many decisions every day. Finding the time to build and implement an equitable wage structure can be difficult. To make the process easier, consider the following checklist:

  1. Decide what you want your compensation package to do.
    • recruit new employees
    • motivate current employees
    • reward well-performing employees
    • minimize risk of violating federal laws
    • build employee loyalty
    • any combination of the above
    1. Determine your internal wage structure; either:
      • evaluate the jobs
      • evaluate the employees
      • create competency groupings
      1. Talk to your employees about their indirect compensation needs:
        • health insurance
        • paid vacation
        • housing
        • child care
        • retirement planning
        1. Structure your total rewards system, including:
          • indirect compensation based on your employee's needs and your compensation objectives
          • direct compensation based on labor market information and your compensation objectives
          1. Implement your new system, remembering to:
            • communicate with your employees about their needs
            • review your compensation package regularly—make sure it is fair, equitable and competitive
            • be flexible and innovative to maintain a competitive advantage
            • maintain both internal and external equity

          Successful agricultural producers rely on common sense when it comes to management decisions. Employee compensation should be no different. If you want employees to be innovative—reward them for new ideas. If you want employees to stay for a long time instead of training new employees every season—offer bonuses or tie their wages to their tenure. If you need employees that show up on time, work hard, and can be trusted with the most challenging of tasks—recruit those people; reward those people; promote those people. The future of your business could depend on it.


          © 2001 Western DairyBusiness Magazine, permission to post in this site was granted by Todd Fitchette of Western DairyBusiness Magazine where this article first appeared in the May 2001 edition, pp. 18-22. Sarah L. Fogleman is a southeast area Extension agricultural economist with Kansas State University. She can be reached at (620) 431-1530. For more information, contact Fogleman or check the Web site

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15 November 2004