Compensation Consternation- Is your compensation structure working for or against you?

Compensation Consternation- Is your compensation structure working for or against you?

It has been stated time and time again that compensation isn’t the only reason, or even the primary reason people leave their jobs.  That doesn’t mean employers shouldn’t keep it on their radar and make it a top priority.

After spending 25 years in human resources, there are two things I have consistently observed about compensation.

#1- Pay evokes emotion in employees.  Employees often correlate their value with the amount they receive in their paycheck.  If value and pay aren’t aligned in the employee’s mind, they can quickly feel underappreciated.

#2- Pay evokes emotion in employers.  Employers don’t want to under pay or overpay for talent.  Retaining people is just as important as considering the bottom line.  And honestly, making pay decisions isn’t always easy.

The good news is employees and employers have something in common!

There is not a one size fits all solution when it comes to an ideal approach to compensation.  Every company should create a structure that works best for them and helps them achieve their goals.  I have found however, that there are five key areas companies should consider when addressing compensation.

  1. Market Position

Do you know how your company compares to other companies you compete with for talent?  Market pay is the going rate other companies are paying for similar jobs in their organization.  Having information about market pay creates a baseline to work from in establishing your approach to compensation. It gives you the opportunity to decide how you want to pay relative to the market at any given time.  For example, will you lead, match or lag relative to the market?

Data about market pay can be obtained from a variety of resources.  An active recruiting effort will provide some of the best information on what the going rate is in the market.  Other options include PayScale, Salary.com, Indeed, Glassdoor, SalaryList and the Bureau of Labor Statistics, to name a few.  Some are fee based, others are low or no cost and some are better than others.  Having some data to get you started will take some of the guesswork out of the picture.

  1. Pay Structure & Process

Many companies fail to have a structured process in place for how pay decisions are made.  They rely on practices from the past, gut feelings, or do what the company next door is doing.

To keep yourself out of a situation that could have legal implications, it is probably a good idea to have some process and structure in place when it comes to job offers, promotions and pay raises.  One example is individuals with similar skills and experience who work in the same role, should be paid similarly. If they are not, the structure should have a way to remedy the discrepancy.

There are a variety of approaches to structuring compensation including pay grades and ranges, broadbands and step structures.  Information is readily available if you want to consider using one of these approaches.

Utilizing some type of framework for making pay decisions is a good idea.  However, it must be said that consistency is key. If the guidelines in place aren’t applied as intended, they aren’t worth having.

  1. Pay & Performance

Should employee performance be tied to pay raises or merit increases?  There is no right or wrong answer to this question.  Employers should evaluate their current state and weigh the pros and cons when making this decision. For example, if a sloppy performance review process is in place, or no process is in place, tying pay to performance will likely result in frustration for everyone.  Leaders may struggle to make the right decision and employees may be treated unfairly.

On the flip side, if clear and meaningful goals are in place, expectations are understood and feedback discussions occur frequently throughout the year, tying the two together can be successful.

If you decide to link pay and performance, be sure that the employee has some control over the outcome.  In other words, they should feel like they can impact the results through their actions.

  1. Leadership Support

How often does compensation make it on the agenda with your Sr. leadership team?  Probably not as often as it should.

Everyone cares about compensation when raises or merit increases are being determined or when your most value player just resigned.  But what about the rest of the year?

A pro-active approach to compensation by the senior leadership team is going to yield the best results.  A simple example includes setting a pay raise/merit budget at the beginning of the year when all other budgets and financial targets are set.  If budget cuts are necessary, prioritize the importance of your pay raise/merit budget and don’t automatically start cutting those funds.

  1. Transparent Employee Communication

What I’m not talking about is the discussion that happens once a year when you tell an employee if they are or are not getting a raise and how much or how little it is.

What I am talking about is telling your employees about your compensation structure and how pay decisions are made.  This includes sharing market pay data, explaining which position the company will take relative to the market (meet, lag, lead) and how their individual performance impacts pay.

If you really want to establish credibility, train your leaders first before training your general population.  Be transparent and be prepared to address pay concerns that will inevitably come up.

While it is true that emotion will always be a side effect of compensation decisions it is also true that information is powerful.  Create a structure, embrace the structure you created and talk about it with your employees.  People appreciate knowing what is being done, the rationale for why it is being done and how it will impact them.

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