The beginning of a new year is the usual time for owners, managers, HR and payroll professionals to work on their compensation planning. The objective of compensation planning is determining what to pay employees to entice them to continue to work for your company.
An organization’s compensation practices can have far-reaching effects on its competitive advantage.
Compensation will include straight salary/wages but also group benefits, perks, stock options, bonuses, incentives, paid vacations, sick days, pensions, etc. You have to balance these costs against what your employees perceive as their value, and that varies greatly by employee.
One might expect that an individual’s satisfaction with his or her compensation would simply be a function of the amount of compensation received: the higher the compensation rate, the greater the satisfaction. However, as Referenceforbusiness.com points out, reality is not that simple. In fact, the amount of pay is less important than its perceived fairness or equity.
Psychologist Frederick Herzberg, author of several influential business management theories, made the point that, “Compensation does not act as a ‘satisfier’, or motivator. But it sure can act as a dissatisfier if someone believes they’re underpaid.”
When planning a compensation package, you usually have to measure compensation levels against other employees in the company, against other employees in other companies in similar positions, and against performance. You often have to determine a salary for a new position, or if you promote someone to new responsibilities. You also have to adjust periodically to compensate for economic factors such as cost of living changes, inflation and competitive pressures (e.g., industry demand for that type of employee, profit margins).
When writing your compensation plan, make sure it includes every form of compensation that is available to your employees (e.g., salary, wages, bonuses, incentives, vacations, paid sick days, overtime, personal days, paid tuition). Also, refer to your company’s policies regarding hours of work, break time, overtime and paid time off including vacations, sick leave and personal days. The plan should clearly state what your employees are being paid in exchange for work performed.
Make sure you understand the numbers that you’re working with in regard to compensation. Perform an annual external market analysis that helps you set realistic, up-to-date salary ranges for your specific market and location.
According to PayScale.com there is an art to designing a compensation plan:
To design a compensation system that pays someone competently—not too much, not too little—you only need to do three things:
- Determine the market compensation rate
- Compare an employee’s work to the market
- Align employees’ compensation with their work, relative to the market
It is simple, in concept. At raise time, it can be this simple:
- High pay + poor results = no raise
- Low pay + great results = big raise
Regardless, your compensation plan should reflect your company’s core values and pay policies. Thus, you must determine your pay policies in regard to hiring, promotion and merit or market adjustments. Ensure that your pay policies are consistent throughout all levels of employment at your company and embody a system of checks and balances for pay decisions.
Communicate with your employees about the company’s pay policies and make sure they are informed of the steps the company takes in order to ensure equitable pay practices.
And finally: be consistent when applying your pay policies and compensation plan!
First Reference Human Resources and Compliance Managing Editor