Competitive Compensation Practices: What is Your Compensation Philosophy?
Salaries are a difficult if not awkward concept to discuss with employees, as well as a frequent topic of misunderstanding. All too often prospective candidates and current employees perceive salaries from only a base pay perspective. Therefore, candidates – and employees – need to understand both the compensation philosophy and the total compensation package of an organization BEFORE accepting, or resigning from, a position.
As a result, employer’s need to shift the focus of the discussion from base pay to total compensation and employee’s need to research and quantify each/every job offer from a total compensation perspective to ensure that they are comparing apples to apples and not apples to oranges.
What is meant by the term total compensation? Base pay is only one part of the total compensation package; it also includes:
- Group health insurance programs – on average, group health benefits cost the employer one-third of the base pay.
- Section 125/Flexible Spending Accounts
- Life Insurance
- Disability coverage
- The following benefits are in addition to the group health insurance program and, as such, can raise the total compensation amount from 50% – 100%+ – depending upon how generous the program and/or whether there’s an employee contribution.
- Incentive compensation/variable pay plans – short and/or long term
- 401k Plan
- PTO (Paid Time Off)
- Sign-on Bonus Awards
- Pensions and/or Profit Sharing Programs
- Stock Options – if appropriate
- Wellness Programs or Health Club Discounts
- Employee Assistance Programs (EAP’s)
- This benefit is “generally” available to all employees, as well as any dependents or other family members living in the home. This is a vital and necessary program for employees, as well as an important and necessary resource for HR departments in counseling those with substance abuse, legal problems, mental health issues and virtually any other situation that’s of a personal and confidential nature (thereby, extricating HR folks from the personal issue(s) and, thus, enabling them to focus strictly on the performance. The best part is that most EAP programs costs approximately $3.00 – $4.00 per employee per month.
- Career Development
- Enhancement of skills by way of career pathing, mentoring programs and/or on the job training
- Tuition Reimbursement
- Unemployment Compensation
- Social Security Contributions
- Employer Paid Taxes
- Discount Coupons to Major Attractions
- Recognition and/or Rewards Programs
- Flexible Work Schedules
- Additionally, people are compensated when they have a rewarding place to work; one in which working conditions are good, jobs are meaningful, people are treated with respect and dignity, where people are listened to and where management philosophy supports personal and professional growth.
- Career Development
The value of the total compensation package is driven by the success and performance of our organization.
The base pay structure is designed to balance the need to attract and motivate employees within the fast paced nature of ever changing marketplace conditions. Depending on what is (or is not) contained in the total compensation plan, base pay considerations would include whether or not the employer wants to be at, above or below the prevailing market trends/ranges within their industry and geographic location, as well as allowing them to attract AND retain top talent.
It is also recommended that your pay structure plan be firm yet flexible so that you aren’t hampered by overly rigid job structures as you move forward. Jobs change over time and, as jobs and technology changes occur, we must have the ability to make necessary changes with ease. The firmness comes with having guidelines that provide a process that allows you to properly evaluate and place positions appropriately.
All base pay structures are based on a combination of market and internal equity factors. While both are important, your system should be weighted in favor of internal equity and reflect a fair relationship between job classifications. That said, most employees and prospective new hires, particularly those under 30 and those without a family, tend to focus solely on the base pay comparisons and are not accustomed to viewing their pay from a total compensation perspective; therefore, when recruiting, on-boarding, conducting performance reviews, administering bonus awards and/or merit increases, employers must work to change the paradigm for all current employees and/or prospective new hires.
Pay for Performance
Providing recognition and reward structures that support continuous learning at an individual, team, and organization level is an integral part of not only the compensation structure, but that the organization is attempting to foster within their culture. Increases to an employee’s base pay will depend on his/her performance and marketplace conditions.
All components of the total compensation package need to be communicated to employees to ensure that they understand their compensation and benefits program and the opportunities available based on performance. How the compensation package compares to those within your industry and geographic region should also be communicated to the employee’s.
To accomplish this, ensure that (1) the necessary internal systems and programs exist to provide the framework for describing and maintaining fair and equitable compensation, (2) managers are trained to fairly evaluate performance, and (3) employees are educated about the programs.
Total Compensation Statements
On occasion, an employer might want to consider the development of total compensation statements. A total compensation statement is – as the name suggests – similar to a bank statement. It’s is an itemized statement for each employee and is intended to highlight what additional costs the employer incurs by employing that specific employee (attached to this blog is a sample of a total compensation statement).
In addition to base and incentive pay, things such as the employer contribution to the employee’s benefits package, payroll taxes, unemployment compensation, social security contributions, health club memberships and the like are all part of the total compensation statement. At the bottom of each statement would be a grand total of what the employer pays each year to retain this specific employee.
If compensation is an issue impacting employee morale, total compensation statements are a great way to illustrate just how much the employer pays out on behalf of each/ every employee.
Researching Salary Information and Data
It’s critically important to ensure that, when budgeting salaries and determining base pay ranges, you obtain comparable data on your competitors. In order to do this, it’s recommended that you participate in one or more confidential salary surveys sponsored by one or more industry trade groups or professional associations.
By participating in the survey(s) and providing them with your salary data, you’re able to then purchase the completed salary survey at a significant discounted rate; however, if you chose not to participate in the survey – or you plan to do so in the future but would like to purchase the data now – it will cost anywhere from $1,000 – $2,500 depending upon the industry and sample size.
Additionally, when analyzing survey data, it’s important that you benchmark your data against other organizations of a similar size, similar or same industry, approximately the same annual revenue and the same geographic location. Most salary surveys contain geographic differentials enabling employers in Kansas City or Omaha to be given a differential that differs significantly from those company’s located in San Francisco or New York and visa-versa.
Lastly, it’s important when reviewing any salary data to make certain that the information being provided is based upon quantitative data. Salary information provided by sites like Salary.com and Payscale.com do NOT contain quantitative data comparisons; instead, the data they provide is based solely on personal self-reported information such as their academic achievements, years of experience, qualifications and/or certifications which may, or may not, be relevant to their actual job and, most importantly, are not used in legitimate salary surveys.
If you’d like additional information on how to formulate your own compensation philosophy and/or develop a total compensation program for your organization, please see the recommended sites below.
Also, if you’re a start-up organization and would like additional information on how to develop your own salary structure, please don’t hesitate to contact Mike at firstname.lastname@example.org or call 773-807-8437.
Recommended Readings and Resources:
Mike Russell is a seasoned professional with three decades of experience in the fields of HR and OD. In addition to having a career trajectory of HR Generalist to a VP within ten years, Mike also has a long and successful background as a Consultant/Business Partner to CEO’s, Presidents and Executive Directors in both the private and non-profit communities across a wide spectrum of industries.
As the sole-proprietor and owner of Organizational Development Solutions (ODS), Mike partners with business leaders committed to insulating their organization(s) from potential liability, increasing organizational effectiveness and adding shareholder value.