Compensation isn't as complicated as some people make it out to be.

Sure, a lot can go into designing a great plan, but the result should be affordable, produce superior results, and be easy to understand and manage. The real issue with most compensation plans is that they’re focused on the numbers that companies care about rather than what’s needed to motivate the people the plan is targeting.

Many of the plans I see are built around factors like what other companies are paying, how the owner was compensated in the past, or how long it takes to calculate paychecks. While none of these are necessarily wrong, they miss the core point: compensation is about motivating people. And, unfortunately, many comp plans fail to get people to actually change their behavior in ways that benefit the business.

When it comes to driving behavior, the amounts matter, but the structure matters more.

Salary, for example, is necessary and motivates someone to take the job. But once they're in the seat, it mostly just motivates them to not get fired.

Bonuses are nice to receive, but in many cases, they don’t directly align with how people spend their time, especially those predictable, periodic bonuses that end up being just another part of someone’s salary.

Then there are the bonuses tied to a single metric. While these can influence behavior, they don’t always push employees in the direction a business owner wants. Take revenue-based plans, for instance—they can create silos or flight risks. Or profit-focused plans, where some people may focus more on controlling costs than on delighting clients.

The companies that are excelling at compensation are doing three key things:

1. They start by setting clear company goals and defining what’s needed from each individual and team to achieve those goals.

2. They communicate the plan clearly—both with the entire team and with each individual.

3. They actively manage people and teams based on the plan, making adjustments as needed to keep everyone aligned and motivated.

A critical reminder:

Unlike Olympic archers who shoot at a stationary target, compensation is a moving target. People’s expectations change, and so do other variables. So, if you haven’t reviewed your comp plan in a couple of years, it’s probably time to check if it’s still effective at attracting, retaining, and motivating top talent.