Designing a Compensation Scheme in Low-hierarchy Scaling Talent-driven Organizations

Abstract

This thesis examines compensation practices in Finnish low-hierarchy, scaling and talent- driven companies using Gioia methodology on a multiple case study. The aim of the study is to establish compensation structures utilized and their effect on employee motivation, retention and employer attraction, as well as suggest guidelines for how compensation systems should be designed and implemented in entrepreneurial organizations.

The findings are separated into two categories: components of a compensation structure and implementation of a compensation system.

Fixed pay (salary) is generally viewed as a hygiene factor by employees, meaning that exceeding an individual’s expectations will do little to boost motivation or retention. Bonuses are an excellent method for profit-sharing and harbor a sense of trust and fairness among employees. Commissions are exceptionally effective at directly motivating some employees but require easily quantifiable metrics to be effectively utilized. Long-term incentives, such as equity programs or stock options, effectively increase organizational commitment, with a positive effect towards retention and motivation.

The implementation of a compensation system is crucial for its success. While flexibility can be seen as an advantage in early-stage companies, it can quickly develop into a liability. To avoid this a company must undergo a formal structuring and simplification of compensation practices. Additionally, transparent communication is necessary to instill a sense of fairness in employees. Interviews show that perceived inequity has a demotivating effect, regardless of a compensation system’s objective fairness.

The findings are complementary to previous research into compensation design. This thesis builds upon and enhances existing research in the selected more specific niche.