Compensation Heat Wave: What You Need to Know to Stay Cool

Susan Willmott, SPHR

Compensation affects both the productivity and profitability of a company and has a major impact on the ability to effectively implement a strategy. Total compensation is typically one of the largest of controllable costs in business.

Competitive starting salaries are needed to attract talented employees. Once competitive pay ranges are established, increases in employee compensation should be tied to factors that add value to the organization.

A compensation structure design that includes fairness and internal equity (real and perceived) is a strong cultural imperative, as well as a requirement to minimize legal exposure. There are various methods in creating a compensation structure. However, the common purpose is to establish value and group jobs into grades or bands, such as:

• Defining three to ten factors that impact pay for each position (for example, time in company, market rate for job, performance). These will vary between jobs—the factors that influence pay for an HR Generalist, a Sales Manager, and a Receptionist are very different.
• Assigning a value to each compensable factor—Education may be very important for some jobs, less important for others, or not relevant at all.
• Grouping jobs with similar compensable factors and values of those factors—these groups become your grades or bands.
• Determining minimum and maximums for each grade or band and then ranking them.
• Documenting processes for evaluating new jobs and slotting them into grades.

Once you have defined what is valued in each job and how they rank against one another, you have created the compensation structure and foundation for a compensation philosophy. The compensation philosophy for your company should be refined by the executive team and then communicated to employees and incorporated into the handbook. This allows employees to understand where the company stands. Once employees know what factors make them a more valuable employee, they are able to understand their current compensation level and how to increase it. Obviously not all compensation factors are quantifiable, so it is important to communicate that factors such as company financial performance and employee attitude are variables also.

Once a compensation structure is implemented your company can say, “We know our pay differences are not related to race or gender because they are determined based on job-based, non-discriminatory factors.” This will limit liability by providing the often missing defense needed to rebut a race or gender complaint.

The compensation philosophy should be communicated early and often to employees as a proactive measure to ensure an understanding of how compensation is determined. This assurance that compensation is consistently determined based on value of the job will prevent the perception of inequities that can lead to complaints, and keep your company cool and compliant.

For more information on compensation structure and strategy, please call 800.882.8904 or email bai@berkshireassociates.com.