Compen infos

8/3/2019 Compen infos

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hat¶s going on these days with compensation and what questions do HR managers haveabout it all?

The following is a collection of questions asked during PayScale webinars over the lastseveral months. The topics covered include: having difficult conversations with

employees about pay, finding ways to reward a top performer whose pay is alreadynear the top of their range and how to support managers in having conversations aboutpay with employees. Answers are provided by PayScale director of customer serviceand education, Stacey Carroll, MBA, SPHR, and also Betty Richardson, CCP.

Working on next year's comp plan? Get it done fast in 5 easy steps. Download ourCompensation Planning Guide .

Q: What do you do if you¶re basing your ranges on the market and the market actuallygoes down?

A: We¶ve actually dealt with this issue in the past year as we¶ve seen some positionswithin the market go down. This is an important point and I think that folks should

decide in advance what you are going to do in these sorts of scenarios. Most people arenot going to adjust their ranges down for any one year movement. They¶ll probablykeep their salary ranges where they are at but make a decision to possibly move thosesalary ranges in the future if they start to see an ongoing trend.

We have also seen that quite a few organizations have frozen their pay to allow for thechanges or lack of changes in the market. That¶s another strategy.

Q: In handling the difficult ³I found a salary report on the internet´ conversation withan employee, how would you recommend addressing a situation where an employee¶scompensation is truly under the market?

A: First, make sure that the manager really does not have the ability to makeadjustments because if your organization does support making adjustments whensomeone is under the market, I think that¶s the first remedy.

However, if your organization is not in the position to make adjustments, the key is tobe open and honest with the employee about the situation and let them know that youare aware that they¶re sitting low in the range and you are going to make every effortto try and move them up but the limiting factor is the budget and, unfortunately, yourhands are tied.

And then, again, focus on those things that may be impactful to that employee. Maybethere are other ways to reward that employee that don¶t include salary. Maybe it¶sadditional time off, maybe it¶s getting to work on some additional projects outside of

the scope of their responsibility, or skills development that will help them get to thatnext level. It¶s a continuously hard conversation to have but it is important and it doeshave to center around honesty. You don¶t want to try and hide it as if they aren¶tbehind the market.

Q: How do you best handle questions from the employee of, ³Who told you that? Whosaid that about me?´



A: It¶s a matter of saying, ³In the course of gathering this information I talked to manydifferent individuals who interact with you on a regular basis. I am not going to give outinformation about who I talked to. But, I am going to give you the specifics of thesituation and talk to you about how your behavior can be corrected.´

Q: I like the idea of a merit increase matrix that looks at both the internal equity

issues, as well as the external equity to ensure that we¶re paying competitively in themarketplace. How does the matrix work if you have made the decision to pay somepositions above market and some positions below market and some at market?

It would be more difficult and you would almost have to have a separate matrix foreach one. For example, an organization may say, ³We know we¶re going to need to payour scientists above market and that¶s our plan but we¶re going to pay our financepeople below market.´ You would have different matrices for those populations. Anotheroption, though I would not recommend it, is to grade them accordingly so that youwould take your compensation plan into consideration when you¶re grading and youwould put some of your finance positions into lower grades so that your philosophycould play out.

Q: The problem I have with explaining the merit increase matrix (where performancerating is compared to position in the pay range) is with those employees whose payrate falls is in the fourth quartile (at 76th percentile or above), they exceed theirperformance goals and yet may receive a lesser increase than those at the lower end of the range. How do you approach this to avoid negative feelings and manageexpectations?

A: Whether you have a matrix or not, there¶s only a certain amount a position is worthwithin a company. My suggestion to make this situation a little bit easier is to be surethat at the start of any plan there be communications and reminders on a regular basisabout what the philosophy is. And, that the plan has two parts. The first part is pay-forperformance but the second is that it be market competitive. You need to communicatethat it is important for an organization from a financial standpoint to be sure thatoverall you¶re paying roughly at, or wherever your target position is, against themarket. And, that no company can afford to be paying all positions, or even anycategory of positions, significantly above the market.

The other part of that discussion can be: the reality is that they are paid well above themarket, but the question then becomes, ³What can they do so that they can be eligiblefor additional increases?´ This is true for anyone in any category. The discussion needsto shift to, ³What can the employee do to have the opportunity to make more money?´ as opposed to, ³What should the company do so they can pay more?´ You shift theconversation to the thing that the employee can do. Certainly, if they are anexceptional performer, perhaps they need to gain specific skills, go on to a special

project, get exposure to something else so that they may become eligible for apromotion. If they are promoted, they will be moved from that highest paid categoryto, depending on how your ranges are structured, one of the two lower-paid or below-midpoint categories.

So, if they can do something to warrant a promotion they are then eligible for futureincreases.



Compensation is an important motivator when you reward achievementof the desired organizational results.

It is said "that money is a powerful source of motivation."

But it is also said that salary increase can only motivate until the nextpay increase is due.

Imagine what the impact is if an employee is at the maximum point of hisor her salary range.

Achievement of the desired behaviors is important in order to enhanceyour organization's effectiveness. In turn, this increases the possibility of success.

Compensation strategy can reinforce the organizational culture that youdesire. This is an enabling organizational culture under which pay islinked to performance.

Your compensation policy must reflect your strategic business objectives.

This becomes all the more important when determining CEOcompensation.

You must clearly define the objectives of your organization so that you

can achieve them by using compensation strategy.These are communicated to everyone soon after a decision is taken. Itcan happen that good decisions fail to achieve results due to poorcommunication.

By providing the right combination ofbenefits which are non-cashcompensation your organization can motivate employees and make themstay to help in its progress.

What is the strategy that we are talking about and how do HR strategiesfit in? Click here to see the hierachical levels of strategy by Jack Welch.

Types of Rewards There are two types of rewards, monetary and non-monetary.



Monetary rewards include salary, bonus, commissions, medical andhealth benefits, holidays, and retirement benefits.

Among the non-monetary rewards are meaningful and challenging works,recognition and career advancement, safe and healthy workingenvironment, and fair treatment.

H ow You Can Make Good Use of Compensation Strategy You can use compensation to attract and retain competent people. Thisobjective requires you to offer a salary that is not lower than the marketrates.

When you want better customer service, reward employee behaviors thatproduce superior service.

Do not harp on the amount of salary you are paying yet at the sameexpect good performance. Your people may conclude that there isinsincerity on the part of management.

Match the written policy with the right and appropriate actions thatdemonstrate to your employees that you are a fair and just employer.

Equ itable Compensation

Like employees working elsewhere in other organizations, your people areconcerned with compensation equity. Take this into consideration indrawing up your compensation strategy.

When people notice inequities, their morale and motivation will suffer.

Do not make it worse by maintaining pay secrecy. This indicates that youmay not have an objective and defensible compensation system.

Researches had shown that pay secrecy generates mistrust, and reducesmotivation and organizational effectiveness.

Of course, you are concerned about competitors inducing your people toleave. These competitors may have the financial capability to pay bettersalaries and benefits.



But by adopting a compensation strategy, you don't have to worry aboutyour good people resigning. If they believe in yourmanagement's fair-handedness, it is very probable that they will not go away.

Decision to leave an organization requires considerations other than or inaddition to dissatisfaction with compensation.

D etermining Rates of Pay Compensation strategy involves considering to adopt any of several waysin setting rates of pay.

y Pay increase based on employee's length of time spent on the job.This is seniority-based pay that is a good motivator in employeeretention. But here, you are not rewarding performance.

y Performance-based pay is intended to motivate employees toperform better.Such a plan is becoming more common whereby the manager andemployee agree on the job goals and performance criteria at thebeginning of a specified period, usually at the beginning of the year.The effect of this as a motivator can vary from time to time andfrom situation to situation.

y You can give pay increases based on job-related skills andknowledge.This is intended to motivate your people to gain additional skills,

acquire new competencies and knowledge. Under this method, youdo not pay employees for the job they are-doing, their job title orseniority.This is competency-based pay.

The second method appears the most reasonable. But you can includethe elements of seniority and competence.

An effective executive compensation is an important area of yourorganization's pay program. Executives are among your key employees.

S alary Increases Your compensation strategy needs to align your compensation objectivesto your organizational business objectives.



Salary increases are part of this plan. By this, you are recognizingemployees' contribution to the accomplishment of your organization'sobjectives.

Salaries are normally reviewed annually and an increase is given if theemployee merits it.

There are times when you feel your organization cannot afford to giveany pay increase.

So what do you do in order not to de-motivate your people?

Consider implementing a policy whereby employees are given salaryincreases when your organization can afford to give them, in arrears. Thisensures that good performers will continue to perform. They know that

they will get what is due to them.

In order to ensure that this is done properly, ensure that the annualperformance appraisal is done as usual. You need the employees'performance data.

Giving salary increase to an under-performer is not justified. There areorganizations who have implemented a policy that employees who are inthe last five percent of the performancebracket will have to go.

Size of Merit Increase This usually consists of payment in respect of performance level. A meritincrease that is perceived as significant by employees can motivate themto perform better.

Make sure that your best employees are duly rewarded, the amountbeing sufficient enough to motivate.

Ensure that your performance review is effective to reduce any possibilityof wrong or biased decisions made.

Pay Increase on Promotion When an employee is promoted, you may or may not give a significantpay increase.

It is not justified to pay an overpaid employee a significant promotionalincrease. Consider all relevant matters before you make a decision.



One important thing to consider is the pay parity with people in the samecategory and performing similar tasks.

General Salary Adjustment In performance-based pay, do not give across-the-board increases.

Differentiate between outstanding, average and non-performers. If not,your employees will lose trust in the system, resulting in little or nomotivational impact. Paying the right salary has impact on employeeperformance and organizational effectiveness.

Automatic Salary Progression This has no relationship to performance. Avoid it as it does not encourageyour employees to improve their performance.

This is fairly common in the public sector. But there are now significantchanges made in accordance with sound human resource managementprinciples.

The only occasion where you can consider giving some salary increasethat is unrelated to performance is in respect of increase in the cost of living.

Anomalo u s S alary

If you have any employee whose salary is below the minimum for the jobor too low in relation to the employee's performance and experience,make the necessary adjustment.

This is in addition to an increase based on performance merit.

On the other hand, you may have an employee who is paid above themaximum point in the salary range for the job.

You may freeze further salary increases until the relevant pay level isreached. Then give merit increase based on performance. Don't giveincrease if performance is unsatisfactory.

Be careful in handling the situation where you do not see the reason forincreasing an employee's salary.

Conduct a salary survey whether your range maximum is lower than themarkets rates. If so, you may want to adjust the maximum range.



Communicate the results to the affected employees. It is also good if other employees know why this is being done.

Do all of these as part of your compensation strategy.

S alary Reviews Compensation strategy requires that the appropriate salary reviewmethod is adopted.

y Fixed-date ReviewsSuch reviews are usually on 1st January each year.

A modified version is to fix the reviews every quarter for differentgroups of employees whose appointment fall within the respective

quarter.

For example, 1st January review for those who joined theorganization between 1st January and 31st March.

Under this method, there is widespread comparison of salary amongemployees.

In many cases, this creates dissatisfaction. And it can affectemployee morale.

y Anniversary ReviewsHere, you review employees' salary at 12-month intervals from thedate of their appointment.

This is a good method to reward good performance. But it is time-consuming and needs a lot of effort.

y Flexible-date ReviewsThe interval can range from nine months to eighteen months.

You can use this method to adjust the salaries of high-performingemployees whose salary is low, say after nine months.

You can give an under-performer less frequent salary increases, sayafter eighteen months.



A non-performer gets no pay increase. Issue a letter cautioning theemployee to improve his or her performance. This is required underthe law. If this continues, issue a show cause letter for poorperformance.

Compensation and S trategic HR Management None of the compensation systems is perfect. Human judgment remainsan important element.

Try to reduce the subjectivity as much as possible. Provide the necessaryskills training for assessors.

Use compensation strategy to:

y monitor cost-effectiveness

Are you getting good returns from the compensation methods thatyou have adopted?y verify legal compliance

Are there legislation that may prohibit the way your organization ismanaging its compensation scheme?

y determine pay equityAre you using strategy to minimize or eliminate pay disparity inorder to achieve maximum employee motivation? and

y link pay to performanceIs a performance-based pay implemented in your organization?

Corporate Transformation and Compensation S trategy It is stated in a Report "Strategic Compensation: How to alignperformance, pay and rewards to support corporate transformation" thatit involves four strategic elements in a closed loop, or continuous process.These are:

y translating business issues into compensation or HR interventionsy designing and delivering them with key objectivesy

leading the resultant change process, andy reviewing or evaluating the outcomes."(www.business-intelligence.co.uk)

The Report finds that strategic compensation is a significant contributorto different forms of competitive advantage, including

y better business results



y more effective performancey stronger capabilityy higher staff attraction and retention levelsy heightened motivation, andy employee satisfaction.

But it cautions on the repercussions if it is poorly managed.If so, it can"de-motivate, is divisive, create upheavals among employees or forcegood performers to leave."

In addition, you may find help from Martocchios' book ""StrategicCompensation: A Human Resource Management Approach".

He mentions criteria in determining employee compensation, design of compensation system, among other things.

N ecessity to Rethink Approach to Compensation Strategic compensation is the type of compensation that can achieve itsintended purpose. Compensation strategy is the course of action taken toensure that this purpose is attained.

There is no excuse in paying salaries that make no difference in theperformance of your employees.

Brent Longnecker ,a leading authority on compensation trends, planningand strategy in his book "Rethinking Strategic Compensation" believes we

need to rethink our approach to compensation.

He provides "all facets of attracting, retaining, and motivating employeesthrough a robust compensation plan."

F orces Affecting Compensation

E ffects of Market F orces on Compensation S trategy Organizations operate in a dynamic market environment. There are timesof plenty and there are lean years.

This matter does not fail to catch our attention especially the effects of economic downturns. Many people particularly corporate heads and



leaders ask important questions how their organizations can continue toexist.

One question that they cannot evade is on compensation.

You want your organization to continue in existence. And reducing theheadcount will quickly reduce your overheads.

You need people in order to survive. However, maintaining the samenumber of employees can lead to bankruptcy.

So what do you do? This is a difficult question to answer.

Further, you need to ensure that your organization does not lose talentand needs to engage talent that you need to help during the hard times.

You also need to pay attention to the retained employees so that theyremain committed and focused. Thus, the importance of preparing acompensation strategy.

You can consider the following:

y Differentiate between top performers and non-performers and evenaverage performers. And reward them accordingly.

y Reward top performers only. This may motivate mediocreperformers to contribute more.

y Check the market whether your compensation system iscompetitive.

y Clearly communicate to employees what their compensationpackage is worth. Then negotiate on possible reduction for certainheads such as non-cash compensation. Don't say demotivatingwords like "You are lucky you still have jobs."

y Make plan to achieve continued employee motivation at least in theshort-term.

y Terminate non-performers, not good performers in sectors that areno longer profitable due to the downturn.

We read from publications or hear from broadcasts that some people arenot too happy that organizations continue to pay incentives to executivesduring downturns.

Some suggest that cost-cutting is not the answer but implementation of compensation strategy.



We need to remember that whatever the economic situation or yourorganizational financial performance is, formulating andimplementing acompensation strategy will ensure the ever-readiness of yourorganization.

Once in place, it is necessary to review the strategy at least yearly andwhenever there is a need to do so as dictated by events.

Compensation Legislation and Compliance It is necessary for people in HR and those in managerial positions toknow and understand that the law affects your compensation andbenefits system.

In the public sector, practically every aspect of employee compensation is

governed by legislation. In most cases, there is not much room forinnovative ideas in formulating compensation strategy.

The one good things about this is that the results are predictable at mosttimes. But it can lead to a lot of dissatisfaction.

Legislation specify job grades, salary band or range, salary increases,promotion, allowances, benefits and so on.

When there are needs for changes, the legislation concerned is amended.

Before any incentive or a new allowance is given or paid the law mustallow it. If not, nobody will or dares to take the risk to go against thestipulated rules.

Some government agencies are usually given some authority under asubsidiary legislation allowing their respective Board of Directors to makedecisions. Such decisions must not go against the provisions of theincorporation instrument.

Role of Legislation in Private S ector Compensation Organization in the private sector are "free" to determine the levels andcomponents of their compensation package. They are "free" to determinetheir own compensation strategy subject to legislation.

Private entities are not free to follow their whims and fancies incompensation matters.



National governments may enact laws forcing private organizations tochange their compensation system and practices. This can happen duringtimes of economic recession when sensitive matters such ascompensation come under close public scrutiny. This will also happen inresponse to sensible public opinion.

If this happens private organizations may not have much choice but tofollow.

This can bring both positive and negative results.

Some argue that self-regulation is better and preferable. But some sort of basic framework is necessary.

An example in which legislation may determine private entities

compensation policy is when a minimum wage is imposed. Here,organizations are "forced to agree". This affects you compensationstrategy.

This is a controversial issue. Employees at the lowest level and theirunions look forward to it. Employers Associations orFederation dread it.

Government officers may not know what further action they need to take.They are responsible for implementation in which case they cannot goagainst against government policies.

Another real possibility where governments may intervene is whenemployees, unions, community leaders, commentators and others believethat the cost of living (COLA) is getting exceptionally high and theyappeal for government intervention.

Your organization may want to offer salary increase to help people copeduring hard times. In this way, COLA become one of the factors indeciding the quantum of compensation.

Further, anti-discrimination laws have impacts on compensation.

We know that market forces impose "unwritten rules" on thecompensation systems and thus compensation strategy. Accepted normssuch as in salary systems affect decisions of organizations.

Apart from the enacted laws, the "common law" can shape compensationdecisions. When cases come before the law courts, judges interpret the





2. Collect all important information on your present rewards system.3. Conduct a Market S u rvey to find out the salary range for each

equivalent position found in organizations having similarities to yourorganization. The pay statistics are usually presented in such a waythat allows you to determine the average pay or wage.

4. D esign a Pay System or a Pay Scale for each group of employeesusing the data that you have gathered.

5. Ensure that every important matter in an effective salary andbenefits program is not missed. For example, how will youdetermine the starting pay of a new employee? How much payincrease will you give when a worker is promoted? How much doesthis differ in the case of managers and executives?

6. See to it that you make necessary changes to your rewardsystem in response to changes within and outside yourorganization.

7. Review your system from time to time for effectiveness

Ann u al Pay Increase One of the tasks you are expected to carry out each year is to makeproposal on the quantum of annual pay increase. The amount of increaseis based on many factors. One of these is how well employees have donetheir jobs. You can get this information from performance evaluationreports after the evaluation is done at the end of the year.

An increase is a reward for a work done well.

Since the increase is based on performance it is important that theperformance appraisal is conducted properly.

After considering everything you may decide that you are not going togive any increase for a particular year. You may want to do this even if employees' performance is encouraging. Usually the reason for makingthis kind of decision is you cannot afford it.

This decision has far-reaching effects. Clearly explain to everyone whythis decision is taken.

Usage of terms relating to E ffective S alary and Benefits S cheme Some people use the words "salary (salaries)", "wages" andremuneration interchangeably. Many agree that salary is a fixed wage



received on a regular basis, say per week or per month. By this, you candetermine the fixed income of an employee.

But keep in mind that "wage" is more suitable for use if the job is paid onan hourly or daily basis or by a piece of a job.

Some other people use "compensation," that is something given tocompensate a person for doing something.

Benefits and Bon u ses Employee benefits are incentives that are non-cash in nature. An exampleis medical and health benefits.

Bonuses that you pay to employees are an additional compensation over

and above the fixed pay. When you pay bonus, you are giving youremployees a share in the profits made by your organization for the pastyear. This is not based on individual performance of employees, whethermanagers or staff.

This means that if, as an employer, you do not have enough cash, nobonus is paid. Based on this, it is not advisable to agree to a contractualbonus.

This is a remuneration that you can put at risk.

Good Pay Package It is not enough that your pay package helps you to enhance the imageof your organization as "an employer of choice." You need to ensure thatthe package can motivate employees to work well and to continueworking for the organization.

It is always better to have a pay plan. At least you will know whether itneeds modifications after reviewing its impacts and by taking relevantmarket factors into consideration.

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