Total Compensation Strategy

Total Compensation Strategy

Today, most large companies emphasize their total compensation strategy. Base pay and traditional medical or dental benefits are just part of what many companies provide. Helping employees realize and identify the value of 401k plans, employee stock purchase plans, or even such things as discounted childcare are important retention factors. This assures an employee will consider all these factors should they ever look at opportunities elsewhere.

Base Pay

An employee's base pay typically represents the largest part of his or her total compensation. For developers, typical base pay is 90% to 80% of total target compensation with the remainder being performance-based. As a senior developer or architect starts to have a larger impact on project success, some pay plans put more base pay at risk (i.e., base pay drops to 70% of total) in return for higher target incomes.

Traditional Benefits

Most organizations today will provide medical and dental benefits, life insurance, and disability insurance. An organization will typically not be able to provide more additional retention factors in this area as long as they meet what is typical in the field. The real area to differentiate an organization is through creative benefits.

Creative Benefits

Creative benefits are anything that do not fall into the traditional benefits category. This is an area where companies may provide significant retention incentives, often at a lower cost than more traditional benefits. Six digit salaries and lucrative stock options are not the only things software development team members look for. Some examples that have been used by different companies with large software development organizations follow.

  • A large aerospace company built an on-site child care facility for its employees. Rather than directly subsidize child care rates, the company simply provided the land and buildings for the facility and outsourced its operation. Child care rates were fixed at local averages, but because the child care provider did not pay any facility costs, they could provide a much higher adult to child ratio and thus provide better care for the children. This was perceived as a major value to employees and undoubtedly helped keep many from considering other companies.

  • A Hollywood computer game development company allows staffers to bring their dogs to work with them. Not stopping at that, the company even supplies unlimited Milk-Bones dog biscuits in their offices for all canine co-workers .

  • Onsite or nearby subsidized health clubs is a common benefit at many Silicon Valley software development companies. Besides simply a retention aid, the side effects of better employee health, lower stress, and reduced medical costs commonly associated with individuals who exercise regularly greatly benefit the company.

  • A midwest life insurance company worried about losing Y2K specialists is offering bonuses totaling up to twenty percent of annual base pay to software developers who stay on board until January, 2000. Rather than offer the bonus in cash, choices include home computers, trips to Disney World, or a year's supply of pizza.

Short- Term Incentives

Short-term incentives are typically bonuses tied to meeting project or group -specific milestones. short-term incentives help motivate employees to do the best thing for the project they are working on.

Long-Term Incentives

The most common long-term incentive in most software development organizations is stock options that vest over multiple years. Here is an example of how stock options work. Rather than give an employee a cash bonus, a grant of stock options might be given instead. There are many types of stock options programs but consider the simple example where the stock options vest at twenty percent a year for five years . Using this example, an employee granted 1,000 options in January 2000 could exercise 200 options in January 2001, and 200 options each subsequent year until January 2005. Typically all unexercised options would carry over until the end of the option period. The grant price of the stock is typically the selling price of the stock when it was issued, or some discount thereof. Here is how an employee would benefit from stock options given this simplified scenario.

In January 2000, the stock price, which in this case was used as the grant price, was $100. Here is how the employee exercised her options.

Table8-1. long-term Option Example
Year Options Exercised Selling Price Profit
2001 200 $120 $4000
2002 200 $140 $8000
2004 400 $150 20,000
2005 200 $200 $20,000
Total 1000 $52,000

The total gain to the employee was thus $52,000, given this scenario. Until the options are fully vested, they have a potential value to the employee that will most likely be weighted before any decision to leave is made. Of course, this value is based on the stock's appreciation . If the stock price were to drop below the initial grant price of $100/share, the options would be worthless to the employee until the stock once again rose above the grant price.

Besides the potential for stock prices to drop, there are other possible retention implications behind stock options in certain scenarios. Consider the case of the network switch startup that gave all employees who joined the company during its first year a large number of stock options that vested over five years as in the above example. Rather than vest on a yearly basis, however, after the first year the stock options vested on a monthly basis. The company was very successful and its stock appreciated several times its original value. What the company did not anticipate, however, was the effect this would have when the company turned five years old. Many of the original employees felt their base salaries had not kept pace with outside competitors ; however, the hefty monthly stock option cashouts more than made up for the difference. Once the stock options stopped at the five year mark, the company all of a sudden found itself at risk of losing many of their key, most experienced software developers. The moral of the story is that long-term stock options are only a retention aid until they are fully vested.

Job Rotations

Many companies have found that job rotations significantly improve retention within their software development organizations. The most successful type of job rotation seems to be one that is approximately eight weeks in length. Software engineers typically rotate out to a non-development organization, such as sales, marketing, IT operations, or finance. Rotations out to another development organization are possible but typically are only useful if there is a prototyping or other short-term development opportunity available. Transferring into the middle of a large project, however, may take a software engineer the bulk of eight weeks just to come up to speed on the project.

The downside to job rotations is that there is always a short-term cost to the hiring manager who must do without the rotating engineer. When implemented correctly, however, the retention, cross-training, and other benefits of a job rotation program far outweigh these short-term costs. In order to make job rotation programs more successful, many corporations have structured programs built around some basic guidelines. Here is how a sample job rotation program might work.

For starters, since job rotation programs are by nature cross-organizational, the support of the president or other executives whom all the organizations report to is needed to ensure success of the program. This executive should be responsible for assuring that each organization's VP or director also support the goals of the program. If it is not possible to obtain this support, it may be possible to start a smaller, more grass roots job rotation program by coordinating between different line managers, but the long-term success of such a program is not likely to be as great.

One manager is placed in charge of the job rotation program. That manager is responsible for administering the program, collecting requests for job rotations from across the corporation, and soliciting line managers for volunteers. Typically, this manager resides with the software development organization.

On a regular basis, the job rotation program manager solicits requests for job rotations and publicizes the program to all the target organizations. Some ways that this has been successfully done is by documenting previously successful job rotations and publishing this information on an internal "job rotation" web page.

Managers in the target organizations who believe they have a job rotation opportunity document their request and present it to the rotation program manager. The request typically includes: types of skills required, length of rotation, location of the rotation opportunity, and a description of tasks to be completed.

Job rotations seem to work best when the work is done at the target organization's work location. If work is done at the employee's home work location, it is often too easy to be distracted by daily tasks. However, on the flip side, some employees might make excellent rotation candidates but personal constraints may prevent them from working in a different geographic location for the time required. If a home location rotation is to be done, the rotation manager and the regular manager must make an extra effort to make sure the employee will not be interrupted in their rotation by regular job duties .

The job rotation program manager reviews all job rotation requests and determines which are appropriate to pursue . When properly implemented, most companies find that very few inappropriate rotation requests are presented. In most cases, the job rotation program manager can work with the requesting manager to modify the rotation request to best assure finding the right rotation candidate.

Approved job rotation opportunities are forwarded to all line managers. The line managers then forward requests they feel are appropriate and timely to appropriate members of their staff. Once line managers are properly educated on the benefits of job rotations, they become some of the biggest supporters of the program. Still, most companies find that allowing the line manager final choice as to how and when to publicize opportunities is appropriate. If a project is in its final month of development before a major deadline, a manager may not wish to have any of his staff off on a job rotation. Given that the job rotation program as a whole is well publicized, it will become rapidly apparent if a line manager never forwards any job rotation opportunities.

Software engineers wishing to apply for a job rotation must first discuss the opportunity with their manager. If the manager approves, the engineer responds to the job rotation program manager and the target manager expressing their interest and qualifications for the rotation opportunity.

The target manager selects the candidate most appropriate for the rotation and then works out details with the hiring manager as to timing of the rotation.

Some companies fund the payroll and travel expenses of the rotating engineer from a separate job rotation program budget. This has two advantages. First, it removes possible budget objections from the employee's line manager. Secondly, it encourages target organizations to submit meaningful and relevant rotation requests, since accepted requests, in effect, are extra budget for the project.

While a job rotation program may seem like a lot of work to implement, the rewards, especially in terms of retention, can be great. Here are some of the many benefits companies have attributed to job rotation programs:

Avoiding "the grass is always greener on the other side of the pasture" syndrome. Many software engineers may have interests in other opportunities in sales, marketing, IT operations, or some other part of the company. Job rotations give those engineers a low risk way to investigate these types of jobs. If the interest is still real after an eight week rotation, then perhaps it really is better for the company for that individual to consider a job transfer. In more cases than that, what the software engineer figures out is that every job has its pluses and minuses and that he or she really does want to remain in a software development organization. In either case, it certainly is better than having the engineer leave the company just to pursue another job change opportunity.

Reduced "job burnout." Like all high tech jobs, software development organizations tend to be high stress places to work. A job rotation gives an employee needed time off from the day-to-day job while continuing to provide value to the company.

Cross-training leads to better software designs. A few weeks in the field in a sales or marketing rotation can give software engineers more hands-on customer feedback about their products than they would normally receive in several years. A rotation in IT operations can give software engineers a realistic look at what is necessary to support their software projects after they are fielded. Much positive feedback can also be received when software engineers see end users actually using their products to run their company. All these types of experiences tend to be channeled back into better design choices by the software engineers on future projects after they have completed the rotation.

Finally, after completing a rotation, many employees have a new-found respect for their line manager. They realize that it was a hardship for their manager to sponsor the rotation and feel that their manager must really value their importance to the organization for supporting the program.


Mentoring programs are a useful retention aid for many reasons. Here are some of the ways that mentoring is used by different software development organizations.

As mentioned previously, one of the best retention tools is good hiring. Some software development organizations now assign a mentor to all job applicants who are being seriously considered for a position. Job applicants are matched up with an employee performing similar job skills and if possible within the same development organization. This gives the applicant a chance to talk to a peer and get honest feedback on what it's really like to work for the company. Most applicants are more likely to trust the opinion of an individual contributor on this type of topic than they are a manager.

The next important time to have a mentor assigned is in the first several months after a new hire joins a company. Every company has its own culture, and software development organizations are no exception to this rule. During the first several months, the mentor is an invaluable aid for everything from helping the employee with paperwork issues (how do I get my payroll check direct deposited) to helping come up to speed on the software design. A software engineer could spend a month reading over design documentation and actual code and not learn as much as by spending a day sitting down with a mentor who knew the software design inside out. The new hire's mentor may or may not be the same as the employee who was the mentor during the hiring process. Many times it helps to make both of these positions separate, giving the new employee more than a single person to turn to for advice.

In the longer run, its a good practice to encourage every engineer to have one or two trusted mentors to help guide their career. This type of mentor need not necessarily be in the same organization. Also, this is the type of mentor that cannot be assigned to someone as an applicant or new hire. These types of relationships need to develop mutual trust. What the managers job should be is to explain the value of having a career mentor and encourage new employees to seek out such individuals as they believe would make good mentors. In the end, it's each engineer's responsibility to select his or her own mentors.

Software Development. Building Reliable Systems
Software Development: Building Reliable Systems
ISBN: 0130812463
EAN: 2147483647
Year: 1998
Pages: 193
Authors: Marc Hamilton © 2008-2017.
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