With historically low unemployment, effective compensation planning is mission critical to any organization that wants to support its employee retention and engagement goals. However, many organizations struggle to truly optimize their compensation budgets to adequately meet the needs of the business and employees.

For instance, some organizations lack a comprehensive strategy, so compensation budgets are distributed and decisions are made without oversight – which leads to employees struggling to understand your rewards and potentially putting your organization at risk for equal pay violations.

While other organizations have a clear compensation strategy but fail to adequately administer it or fail to train managers to make good compensation decisions – so all employees may end up getting the same 3% raise, or worst, the wrong employees get a higher raise than more deserving employees.

So how can your organization make the most out of your compensation budget? Here are four tips that will help you. 

Man studying compensation budget

1. Develop compensation policies

It’s not uncommon for organizations to not have a formal, written compensation strategy, in fact, according to a recent study by WorldatWork, only 50% of organizations have a compensation strategy that is formalized and written. However, clear compensation policies help your organization pay employees consistently and can help ensure your compensation funds are aligned to business goals.

Good compensation policies support your compensation strategy and outline rules for administering your compensation tactics (i.e. salaries, bonuses, incentives, etc.). For example, here are some areas that a strong compensation policy will address:

  • The roles for which you will lead, lag, or match market compensation rates
  • How (or if) you will link compensation with performance
  • Who approves overtime requests
  • How often compensation decisions are made and who makes those decisions
  • Who approves salaries that fall outside of typical salary ranges
  • Who determines compensation decisions and who has final sign-off

Ultimately, your compensation policies will provide guidance to those making compensation decisions and transparency for your employees, speeding up the process and increasing engagement.

2. Benchmark and establish salary ranges

Benchmarking is the process of understanding the “market price” for the roles at your organization to help you develop competitive compensation packages. Many factors go into benchmarking, including:

  • Position role and responsibilities
  • Level of education required
  • Company industry
  • Size of company
  • Geographic location

For organizations that have never benchmarked their roles before, it can quickly become overwhelming. It's important to learn about benchmarking best practices at the beginning of the process so you don't get bogged down.

After benchmarking salaries, your organization should establish salary ranges for your roles. Salary ranges are important to provide a level of consistency between salaries for employees in the same role, but also flexibility to pay more or less to account for differences in performance, experience, education, etc.

You can establish salary ranges by:

  • Determining whether you want to lead, lag, or match the market – this will determine what your compensation midpoint should be
  • Identifying roles with similar salary benchmark levels – for instance, a marketing specialist may have a similar salary benchmark to an operations analyst
  • Creating salary ranges based on compensation benchmarking data and your strategy (whether you want to lead, lag, or match the market) – the range will be adding and subtracting about 30% to get the minimum and maximum values, so if your benchmarking data says a marketing specialist should make $60,000 per year and your organization decides to match the market, the $60,000 would be your salary range midpoint, the minimum would be $46,000, and the maximum would be $78,000

3. Communicate your compensation strategies and policies

While written compensation strategies and policies are incredibly helpful to help HR teams develop compensation plans, many employees and managers don't have exposure to this information or find it difficult to understand.

For employees, this lack of knowledge often leads to a lack of understanding around why they’re being paid at a certain level – which can ultimately lead to dissatisfaction with their compensation and disengagement. For managers, this lack of understanding means their compensation decisions may be misguided or lacking alignment with business priorities.

A comprehensive compensation communication plan outlines specific communications for employees and specific training for manager on your compensation strategy and policies. It can include:

  • Timing of the compensation cycle and who is eligible for merit increases
  • Clear explanations of salary ranges, compa-ratio, range penetration, and other jargon that employees and managers may be unfamiliar with
  • How compensation decisions are made and who is the final approver
  • How performance influences compensation decisions

For managers, compensation training can include:

  • How to determine appropriate merit increases
  • What their budgetary limits are
  • How to handle compensation exceptions (employees whose salaries fall outside of the salary range given)
  • Tips for communicating compensation decisions to employees

Ultimately, effective communication of compensation strategies and policies help boost the transparency you started fostering by developing policies in the first place and build deeper trust between employees, managers, and your organization. Make sure you look into creating a compensation communication plan that will be a strong fit for the employees and managers in your different departments.

4. Think outside the salary box

Many organizations are feeling the pressure to offer higher salaries or bigger bonuses to attract and retain their employees. However, some organizations are getting creative and offering unique rewards for their employees. Here are some examples:

  • Trips: All-expense-paid trips to "bucket list" locations are a great way to reward your top performers. This was once a reward for sales organizations but is now spreading to other functions.
  • Vacation time: For organizations with limited vacation time, rewarding employees with additional paid vacation days can be a great option (just make sure they actually take the extra vacation).
  • Employee/team experiences: Tickets to a professional sports game, fancy dinners with senior leaders, or company picnics are all great rewards for teams or departments that have excelled.
  • Development opportunities: A lot of top employees want to continue to improve and actively look for opportunities to learn or stretch their skills. Giving them opportunities to attend classes or conferences they'd otherwise have to pay for or assigning them to larger projects can be a great way to reward them.

While many of these rewards still require budget to be allocated, many times it turns out the cost of these rewards could be lower than a bigger bonus or merit increase – yet research shows they’re 8.5 times more effective.

Conclusion: A strong compensation strategy can be a powerful advantage

With clear policies, a communications strategy, creative thinking, and a robust HCM solution, organizations can improve the allocation and governance of compensation budgets.  Learn more about how a unified HCM solution can support your compensation strategy and ensure your get the most out of your compensation budget.

Learn more about how HCM helps with compensation management

Published: Tuesday, January 14, 2020