Spring is Salary Survey Season and fall is typically Compensation Planning Season. Many Compensation/HR professionals are analyzing their newest compensation surveys and helping their organizations figure out how much to spend on salary increases for next year. Here are several ways to improve the process: A well executed compensation planning process will help your organization properly recognize employee contributions, reinforce the pay for performance philosophy and control labor costs by making informed pay decisions. //chrg.compensationhr.com © 2015 David Weaver. All rights reserved.
Respond to the following:You have recently been hired as the HR manager of a small furniture manufacturing company that has 63 employees. These employees include everyone from line workers to upper management. You are the first HR person the company has had. One of your first assignments was to evaluate the fairness of the company’s current compensation system.Based on your evaluation, you have discovered a number of inconsistencies:Some line workers earn more than managers.Some managers earn twice as much as other managers even though the work is similar.Some line workers are making significantly more money than others even though they are performing the same work.What recommendations would you make to improve the consistency of the company’s compensation system?Be sure to provide the rationale for your recommendations.
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What recommendations would you make to improve the consistency of the company’s compensation system?
By Indeed Editorial Team
Published August 25, 2021
An effective compensation strategy can help a company's hiring process become more efficient. These strategies typically combine a company's hiring budget with a compensation package in an attempt to recruit the right candidates. Understanding the components of a compensation strategy and how to create one can help you implement a package that benefits the needs of the business and its employees. In this article, we discuss the definition of a compensation strategy, explain its purpose, explore some key components and show you how to create one.
What is a compensation strategy?
A compensation strategy is a plan that discusses how much, and when, to pay employees in an organization. However, it may change over time as the needs of the business shift. Although a major part of the plan focuses on staff financial compensation associated with their roles, skills and education, it also includes benefits and perks. It also supports a company's plan and its overall business goals by helping companies recruit and maintain efficient team members.
Related: How To Calculate Earned Income
What is the purpose of a compensation strategy?
Human resources teams often use compensation strategies to locate and onboard employees who can provide the company value. The purpose of a compensation strategy is to:
Hire qualified employees: Compensation strategy evaluates how much compensation is necessary to reach qualified employees who can meet the goals and objectives of the business.
Reward employees for good work: The strategy outlines the rewards an employee receives for meeting certain objectives.
Outline the definition of a company's values: It also outlines how a company values compensation, which can provide consistency in creating compensation packages.
Improve company morale: Offering a transparent salary with incentive options can help improve company morale, which can then reduce turnover rates.
Related: Understanding Recruiting Expenses: How Much Does It Cost To Recruit an Employee?
What are the key compensation strategy components?
A compensation strategy typically includes four key components:
1. Base pay
Base pay refers to an employee's salary or hourly pay for their particular job. It's the amount the company and individual agree upon during the hiring process, which can also be commensurate with their level of education and skills. When determining the amount of base pay, it's also necessary to decide the frequency. Some employers may pay weekly, whereas others may pay biweekly or monthly.
Related: Types of Pay Structures and When To Use Them
2. Incentive pay
Providing incentive pay can also help encourage employees to complete certain goals or to meet performance objectives at a set time. It's a type of indirect pay that typically offers additional compensation outside of an employee's regular job tasks or benefits, such as:
Referral compensation
Commission payment
Bonus payment
Overtime payment
Cost of living increase
Profit-sharing
Stock options
Related: 4 Examples of Key Performance Metrics To Track
3. Employee benefits
Employee benefits are the additional benefits that employees receive besides their base pay, which may include:
Health insurance
Dental insurance
Vision insurance
Short- and long-term disability
Life insurance
Retirement contributions
Company vehicle
Phone allowance
Gym memberships
Travel benefits
4. Time off
Time off refers to a company program that compensates employees when they're not at work. Most companies require employees to work for the organization for a specific time period before being eligible for this type of compensation. They may also require that the employee work a specific schedule, such as full-time employment. Time off may include:
Paid time off
Vacation time
Personal leave
Maternal or paternal leave
How do you develop a compensation strategy?
You can develop a compensation strategy with the following six steps:
1. Review your compensation philosophy
A compensation philosophy is a statement that a company creates to set the system of its reasoning for pay. This philosophy helps companies decide how compensation aligns with their mission and goals. It may include:
How compensation supports the company's goals and objectives
How compensation aligns with the company's values
How the company aims to use compensation to become a competitive employer
The company's unique value proposition
The strategy is the actual actions, or procedures, put in place to activate this philosophy. Reviewing or creating your company compensation philosophy can help you determine your strategy. This includes evaluating how compensation helps the company reach its goals.
2. Collect data
Before creating a compensation strategy, it's crucial to collect employment data to find out the average annual salary of employees in a specific industry and position. This can include data on current demand in the industry and the number of available, qualified employees. You can also gather this information using market trend reports or with information from the U.S. Bureau of Labor Statistics.
3. Create guidelines
Create guidelines you can use when determining compensation packages for present and future hires. This can include specific rules, or policies, that you apply when calculating compensation. It may also include certain criteria that employees must meet to earn certain types of pay. It's also a good time to review state and federal laws during this step, to adhere to compensation policies set by the Equal Employment Opportunity Commission (EEOC).
4. Review the company budget
When you know how much funds the company allocates each year for compensation, consider reviewing the company's budget. Try separating it into different departments, so you can determine if any budget adjustments are necessary. You may also want input from department managers during this step to understand how much they plan to offer for different levels of employees.
5. Create pay structures
Creating pay structures means creating salary ranges, or a range of income that you plan to pay employees. A range gives you more flexibility when making or negotiating offers and can also give current employees an idea of promotion opportunities. This can include choosing incentive pay structures and deciding hourly versus salary.
6. Discuss compensation strategy with other team members
Getting feedback from other team members can help you align everyone's goals. This may include discussing with department leaders, supervisors and others involved in the hiring or training process to ensure the compensation strategy is fair and meets industry standards. It can also speed up the hiring process as you already know how much salary range is available for positions. Once everyone agrees to the plan, review and publish it.
Tips for creating a compensation strategy
Here are a few tips you can use when creating a compensation strategy:
Be consistent. It's important to apply the same compensation criteria to staff and management to maintain a level of transparency and trust within the company.
Set a timeline to reevaluate your strategy. Creating a specific time to reevaluate your strategy can help you confirm that compensation meets industry standards or change the strategy if needed.
Conduct salary audits. Conducting salary audits can help you measure how much you're currently paying employees for certain duties. This allows you to compare this information with new positions, calculating a fair compensation.
Focus on all-inclusive compensation. Including benefits like health insurance and retirement contribution to your competitive pay model can also help you recruit high-quality candidates interested in those all-inclusive perks.
Please note that none of the companies mentioned in this article are affiliated with Indeed.