When the word “compensation” is brought up in conversation, most people assume it just refers to what a person is paid. However, to the Human Resource community, the word compensation is a much more complex topic.
We spoke with Sue Bailey, ERC’s Senior Consultant, Compensation & Benefits, about what HR professionals should look at when it comes to the top compensation topics.
Re-examine incentive and variable pay plans
Bailey says variable pay plans are something that are often overlooked, and should be reviewed or updated periodically to reflect market pay practices and organizational priorities and objectives.
In addition, “While base pay levels are increasing, the rate is still relatively low and employers should ensure they make the best use of incentive and variable pay programs to reward the achievement of defined results. It’s important that the plan design support strategic objectives and is performance-based,” says Bailey.
“The beauty of a well-designed incentive plan is that it drives desired behaviors, supports the achievement of organizational goals and objectives, and should also be self-funding. This means that payments are in proportion to the results, and the organization doesn’t pay awards when the results are not achieved,” says Bailey.
Update antiquated pay and performance management practices
This includes:
- Ensuring base salaries are market competitive and review guidelines for annual merit increases and promotional and lateral job moves
- Incorporate performance management processes that include opportunities for meaningful employee and manager information exchange, goal setting and action planning
- Being transparent: communicate your compensation strategy, performance management process and pay practices or policies
Re-examine pay allocation approaches
“To ensure the most effective use of dollars from small merit increase pools, it’s important to re-examine different approaches to allocating those increases to employees. This includes developing approaches to incorporate strong performance management processes that differentiate rewards in proportion to individual contributions and competitive pay needs,” says Bailey.
Approaches vary depending on an organizations culture, the strength of its existing performance management processes and the skills and competencies of employees who manage and conduct those processes.
However, it’s never too late to start developing the different components that comprise an effective pay for performance program.
Update competitive market pay studies
“Well designed salary structures reflect both the external market and internal equity relationships,” says Bailey.
Market pay is accelerating and salary budgets are expected to grow as well. Market pay on a job-by-job basis changes over time based on factors such as geography, industry, the economy, the development of new or “hot” jobs, technology advances, and changes in the supply and demand for skills. Maintaining updated market pay data is essential in remaining competitive.
“Compensation can be a sensitive and often misunderstood topic; it’s important to examine the foundation of your pay practices and strategy, to ensure the attraction and retention of the talent that drives organizational success,” says Bailey.
