08/08/2013 04:40 pm ET Updated Oct 08, 2013

How Much to Pay: Re-examining the Compensation Quandary

As a business owner/entrepreneur, how many of the following phrases have you heard while someone was asking you for a raise?

1) I am getting a divorce, so I need a raise
2) I am buying a new house, so I need a raise
3) I am having a baby, so I need a raise
4) I am paying my parents' medical bills, so I need a raise
5) I want to go on a nice vacation with my family, so I need a raise

I don't know about you, but in my 25 years of business experience and running large organizations, I have heard all of the above and roughly a million more (including my personal favorite, "My German Shepherd, Max, needs an operation so I need a $10,000 increase").

And regardless of the "reason" for asking for the raise, my response is always the same . . .

"We don't pay you based on your needs, we pay you based on your value to the company."

The sooner EVERY entrepreneur and business owner can say those exact words, the easier their life will be.

Now I do not mean to be insensitive -- but come on, we are not banks. We are growing companies that have many great employees who are busting their butts to make a great living.

When you get that one employee who has the "me and only me" mentality, my trademarked phrase above is not only more than appropriate... it feels kinda good!

Still, the question I receive most from growing organizations is, "How do I compensate my employees?"

This question often keeps business owners up at night and, sadly, there is not a magic wand. But there are certain guidelines that I like to use.

Let's start with the old debate between a flat salary and variable compensation. Frankly, I've seen both of these models work just fine at times, and fail spectacularly at others.

Meaning that the first rule of compensation is -- it should never be static.

But after reading many different theories and testing virtually all of them, I am a big fan of Dan Pink, who essentially preaches to get the issue of money off the table.

In order to do this, you need to give your team perceived value through the following three categories:

1) Autonomy: Make your employees responsible for something. Make sure they understand that responsibility goes hand-in-hand with authority and accountability. This means that you respect their decisions and do not micro manage them, their employees, and their processes.
2) Mastery: Give your employees the opportunity to become the best they can be at a specific tactic, strategy, or niche. You may need to send them to events and provide other special training. You are encouraging them to be your resident expert.
3) Purpose: Create a corporate culture where your employees believe in what they are doing, and that the purpose for your organization's existence is larger than them. Create a mission statement and core values and live them every day.

I know what you are thinking -- that this perceived value thing does not pay the bills. And you are absolutely right.

Show Me the Money

This is where the intrinsic value part comes in. Pay more than a fair value.

What I find that works best is to make sure you understand the going rate of the position you are trying to fill. Ask that person what they believe they are worth to the company.

Once you agree upon a number -- pay them approximately 20 percent more and do not promise any bonuses or variable compensation whatsoever.

What you have just done is prove that the employee's compensation is more than fair, and that you value them. Then, should you decide to spot bonus that person for an exceptionally good job or give them a Christmas bonus, it really is that -- a bonus -- not an entitlement.