3 Tips for Updating Your Compensation Program

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Updating your salary structure in 2011? Market data discrepancies, pay compression, and alignment with the compensation philosophy are all problems employers experience when updating their compensation programs. Here are some tips to deal with these problems.

Problem 1: Market data shows discrepancies

You’ve established pay rates for your organization’s positions based on a salary survey, but the next year the same survey shows that a given job encountered a moderate salary decrease or large increase. Market data discrepancies are a common problem many employers face when updating their compensation programs.

Salary surveys sometimes show discrepancies annually. These discrepancies occur mainly from differences in participation from year to year (different or new employers submitting data for the job). Other reasons for discrepancies may include organizational factors, such as pay decreases or large merit increases and higher or lower demand for certain skills or jobs in the labor market. To cope with market discrepancies...

  • Use multiple sources of market data (salary survey information) to establish market averages to benchmark your positions versus just using one source. By taking more data into account when benchmarking, you dilute the impact of these market differences on your pay decisions.
  • Although it may be tempting to use the most specific and targeted breakouts available to make pay decisions, these are often more susceptible to variance and discrepancies because they have lower participation. As a general rule, it’s important to use breakouts of data that have the most participation from employers (such as “all employers”). These are the most reliable figures and are unlikely to experience major differences year over year. 
  • Be cautious in making pay decisions annually. Continue to benchmark pay on an annual basis, but only make pay decisions based on distinct trends. Market data is highly susceptible to variance and trends are more likely to become evident over multiple years.

Problem 2: Jobs show pay compression

Pay compression is a common problem organizations experience when revising their pay structures. It results when there is a pay difference between positions requiring different skills and responsibilities – when lower-level jobs are paid as much or more than higher-level jobs. It often occurs when typical adjustments or increases have not been given and instead pay raises are only given to a select few employees (such as top performers). It may also occur when a salary structure is not used. To resolve the issue of pay compression…

  • Determine which positions show pay compression. Is it a job-specific issue, affecting only one or a few employees? Or is it a widespread problem?
  • Create a salary structure with formal pay ranges. This will set the upper and lower limits of pay that employees can earn for a given job or job family. Keep pay ranges updated once they are established.
  • Consider coupling your market analysis with a job evaluation. Job evaluation is often an under-used method of determine pay rates, however, establishes which jobs are most and least valuable to the organization and thereby encourages internal equity. It involves assigning points or ranking jobs according to their value to the organization.
  • If ranges are established, adjust pay ranges by the same figure each year – such as a cost of living or across-the-board increase to ensure that pay keeps in line with the market.
  • Consider using lump sum bonuses instead of merit increases to reward employees who have hit the maximum in their pay range. Similarly, for new-hires with special skill-sets, you may consider offering a lump-sum sign-on bonus.
  • Establish career paths. Pay compression is more likely to occur in organizations that do not have clear advancement opportunities and upward mobility. Such paths provide more opportunities to earn more pay and reward performance. 

Problem 3: Pay not aligned with compensation philosophy

Let’s say that your organization’s compensation philosophy is to pay all of your organization’s jobs at market, which means at the 50th percentile or median pay rate. Perhaps this philosophy has been newly developed or changed since the creation of your current pay structure. After analyzing the market, you find that you are actually paying above or below market for some positions. This is your organization’s position to market.

Your organization’s position to market should not necessarily determine its compensation philosophy. For example, if your philosophy is to pay “at market” and your organization pays “below market” for some positions, this should not lead you to change your compensation philosophy, unless it feels that this is best for the organization’s attraction and retention of talent. To address this problem...

  • Determine whether the philosophy applies to all positions. It’s important to be aware that a compensation philosophy does not need to apply for all positions.
  • Keep pay where it is and “red line” the employees paid above market until the market catches up to their pay rates.
  • Make pay adjustments to employees paid below market, unless reasons for this discrepancy are justifiable.
  • Hire new employees at the “at market” rate.

Updating a compensation structure presents its challenges for many employers, and can be one of the more complex tasks HR encounters. Should your organization need additional assistance with updating its compensation system, be sure to check out the resources ERC offers to support your compensation programs below.

Additional Resources

Compensation Surveys
Our 2011 compensation surveys are currently open for participation. These surveys provide local market data for Northeast Ohio employers to benchmark various positions. To participate in our 2011 Salary & Wage Surveys, please visit our ERC SurveyCenter and register as a first time user. To participate in our 2011 Executive Compensation Survey, please click here. If you need your login information, please contact surveys@yourerc.com.

ERC members also have access to a wide range of other compensation survey resources. To learn more, click here.

HR University Series
Not sure about how to create or update a compensation plan? Join us for HR University’s Compensation & Benefit Plan Design course which includes a hands-on exercise to help you learn how to administer and update a compensation plan. Please click here to register for this course.

HR Consulting
Our compensation consulting services cover a broad range of assistance on the total rewards spectrum; from basic job description updates to the complete design of organization-wide base salary compensation systems and variable pay programs. For more information, please contact consulting@yourerc.com.

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