Compensation management is a complex function that is crucial to business success. Get it right and you’ll attract and retain the best employees, and promote equitable pay practices, while still enabling the company to operate profitably. Get it wrong, and you’ll see the impact in vacant positions, stagnated company productivity and escalating recruiting costs.
Let’s start by looking at some of those compensation “don’ts.”
The Top Five Compensation Mistakes—and How to Avoid Them
1. Using the same compensation strategy year after year
You may have crafted the best compensation strategy and plan in the world five years ago, but if you’re still using that same approach today, you’re probably already seeing the results in attrition, vacant positions and turned down offers.
Whether you’re a one-person compensation department or have a team of 20, it’s critical to regularly study the market data and stay on top of compensation trends in your industry and geographic location, particularly when it comes to your mission-critical job titles.
2. Not listening to or empowering your managers
Your managers are on the front line, working with their employees every day. As such, they’re typically the first to see the warning signs that an employee, or groups of employees are thinking of leaving your company, like attitude changes, decreased productivity, or more frequent absences.
It’s important that you listen to your managers, and give them the tools and flexibility they need to retain their best employees, combat burnout and reward their top performers.
3. Not communicating your compensation strategy and rationale
When it comes to compensation, what your managers and employees don’t know could hurt your retention rate and your organization. Lack of transparency, and inconsistent or non-existent communication about pay practices will often have your employees assuming the worst.
While the amount of information companies share will vary, it’s important to have a clear communication plan for each level of your organization. Take the time to train your managers on your strategy, and how to talk about compensation with their employees. You’ll reduce the doubt and motivate employee to stay.
4. Giving everyone the same raise
While giving everyone the same raise percentage might simplify compensation management, taking the blanket approach to salary increases can be a demotivator, particularly to your top producers. It also enables your lower performers to fly under the radar, and gives them no real reason to up their game.
Instead of giving everyone a standard raise, take the time to create a consistent policy around how pay raises are awarded.
5. Not having a compensation plan in place
Without a compensation plan in place, you run the risk of wasting budget on the wrong employees, have no way to guard against pay inequities, and do little to ensure your organization can compete for, hire and retain top talent.
By taking a strategic, proactive approach to compensation, organizations can continuously adapt to market changes, promote internal equity and effectively scale as the company grows.
The best way to start this process is by conducting a compensation analysis.
How to Conduct a Compensation Analysis
Conduct your compensation analysis by going through this step-by-step process:
Step One: Set goals
Identify what you want or need to accomplish with your analysis. Reduce risk by identifying pay inequities? To better compete for talent in a tight market? Position your company for coming growth or acquisitions?
Setting those goals upfront will ensure you put the right methodologies in place as you go through the audit process.
Step Two: Examine your organization’s existing pay practices and philosophy
Do you have a pay philosophy? Where did it come from? When was your current pay practices put into place and what are they based on? Are there any safeguards to ensure employees are paid fairly, regardless of gender or race? Are there any outdated practices or salary structures you need to replace, like not aligning performance and annual performance reviews to pay increases.
Step Three: Study the market data
The best way to benchmark salaries against competitors, recognize compensation trends and to get a clear understanding of the market value of specific jobs is by analyzing salary market data. Experts recommend using at least three different data sources, which can include:
Published, traditional surveys from government agencies, associations or consulting firms. These typically cover a wide range of jobs, which is a plus, but these surveys are typically conducted annually and published around six months later, so they don’t always reflect what’s currently happening in the market and may not include newer job types.
Internal company data from your HRIS or another internal database. While this information is valuable way to compare pay between departments or people with the same title, it doesn’t give you a picture of what’s happening in the external market.
Custom surveys that are specific to your individual market, specially designed for your business.
These are very accurate, but also can be expensive.
Crowd-sourced, employee-collected data from online surveys, which typically provide the most current market data because information is collected in real time. Because it is employee-submitted, it paints a more accurate picture of the actual skillset required for the job. When using employee-reported market data, make sure you know the validation process for the data to ensure legitimacy.
Free, online data is available by pulling information from listings on job sites; however, culling through this information is time consuming and the published ranges in job postings may make it difficult to determine the actual compensation offered to the person who accepted the role.
The real key is finding the right combination of reliable data sources that fit your market, your jobs and provide in-the-moment data.
Step Four: Benchmark your jobs and set salary ranges
Experts recommend benchmarking between 75 percent and 80 percent of positions within your organization.
Once those positions are selected, look at the cumulative data on the market value for those specific positions, what you’re currently paying, and apply your compensation philosophy to the numbers (whether you want to pay above, meet or pay below market averages). Then, set guidelines for compensation.
If you use job-grade ranges, provide a minimum, midpoint and maximum for each of your jobs in each geographic location, based on your budget, size and need. So, an organization with 100 jobs will have 100 specific salary ranges.
For grade-based ranges, jobs with similar market price, responsibility level and value are grouped into specific salary grades, according to their market value, then adjusted for internal alignment.
Although there is no hard and fast rule about salary widths, the wider the salary range, the more opportunity there is for employees to move up in salary. So, you may want a broader salary range for positions, like account managers, where you want to encourage employees to stay in their jobs for a long time.
Step Five: Identify and address the outliers
Next, compare your current employees’ pay against the new ranges to identify anyone who falls below the minimum or above the maximum for their range, and apply your policy for handling the outliers.
In some cases, it may be advisable to bring any employee below the minimum of the range, or “green circle” up to the range minimum, unless there are justifiable business reasons why that person is paid less than others in the range. You can do this immediately, to ensure equity, or, if there are more employees in this category than budget allows you to correct at one time, consider a multi-year strategy to resolve the pay issues.
For those employees currently paid over the maximum, or “red circle,” consider freezing their salaries until the market catches up to them, increase the number of months between their salary increases from 12 months to 18, or train those to move to a job with a higher pay bracket.
Whatever you do, it’s important to have a formal strategy, and buy in from upper management and the appropriate stakeholders before moving forward.
Step Six: Communicate
When your compensation benchmarking is complete, spend time educating your managers on what was done and training them to talk to their employees about pay. Create tools to help them explain pay ranges, how these were set and how raises are determined.
And don’t forget to communicate directly with your employees. Even if you don’t want to be transparent about exact ranges, ensure that they know that there’s a formalized, data-driven compensation strategy in place.
Step Seven: Repeat
Compensation analysis and planning is an ongoing process. Make sure you keep your plan current to the market with a regular review cycle. While this process takes time, by taking a data-driven approach to how you compensate employees, you ensure equity, consistency and help keep your company productive and competitive—no matter what the future holds.
