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Tuesday, May 03, 2011
A Compensation Primer: Part 3 of 3
Posted by Sarah Conroy on 5/3/2011 2:48:00 PM
This continues our conversation about compensation practices for your company. Our last entry focused on compensation philosophy development, salary bands and pay laws. In this entry we focus on compensation analysis.
Companies typically test jobs to the market with some regularity to ensure their bands are accomplishing their objectives. These market analyses are usually performed by a compensation analyst or consultant using specialized databases that incorporate a lot of survey data, both public and private, based on geography, industry and other factors. It is important to use a reliable proven database/service. With the explosion of internet sites, there are services out there that are skewed. This is too critical to get wrong! There is also data produced by our government based on the data required to be reported by employers. These are also good resources and I have included them below for exploration. It is important to note that there are antitrust laws that disallow businesses from sharing compensation data directly – this is why we use aggregate data.
While it is too much for this primer to get into detail here, please note that besides tests to market, there is a need to perform internal equity analyses to ensure that your employees are within bands and compensated appropriately and effectively. You may have heard the terms red circle and green circle rates. These simply mean that someone who is receiving pay above the band for that role is “red circled” and will need to be addressed and someone who is receiving pay below the band is considered “green circled” and will need to have pay adjusted into the band. Both instances warrant a closer look at the jobs in question. These practices are preventive maintenance to keep the engine of your company running smoothly.
We have just scratched the surface of compensation in these last two blog entries. There is much more to be said on incentive compensation, executive compensation and even more on exactly how compensation is provided, be it direct pay or some sort of deferred compensation arrangement, eg – ESOPs (employee stock ownership programs) or profit sharing programs.
Where can you get more information?
Well, certainly I’d advise you to retain some professional expertise to assist you in developing your compensation program. There is much at stake and doing it right will save you a lot of money in the long run, not only directly in attracting and retaining talent, but also indirectly by ensuring great employee relations and earning a reputation as the among the best places to work. Please also give me feedback about what other HR topics you would like more information about. I’m here to help, so let me have it! I can best be reached at email@example.com and look forward to hearing from you.
As mentioned above, here are some resources for compensation information for you to use, courtesy of your tax dollars!
The O*NET program provides a lot of occupational data including wages and is provided by the US Department of Labor: http://www.onetonline.org,
Quarterly Census of Employment and Wages (QCEW) is a federal-state cooperative program that collects employment and wage information for workers covered by State unemployment insurance (UI) laws. http://www.maine.gov/labor/lmis/qcew.html
This continues our conversation about compensation practices for your company. Our last entry focused on the basics of organizational development and position descriptions. In this entry and the next, we will delve a little deeper and touch on compensation structure and how you know what to pay.
So…..How Do You Know What to Pay?
Companies generally look to the market and particularly to their competition to determine what to pay and how to pay it in determining a compensation philosophy for the company. The philosophy is a way to carry out the needs of the business. For example, how much will be base pay vs. incentive compensation and for which roles? Will the company be known as an employer who seeks to attract by generally paying above market or look to shine to prospective talent in other areas like work/life benefits?
Of course there are other factors too. There are legal considerations such as minimum wage and overtime pay depending on whether the position tests out as exempt or nonexempt in accordance the white collar provisions of the Fair Labor Standards Act and equal pay laws. You will be subject to Maine law as well as federal law for employees in Maine. If you have employees in other states, you will need to look at their requirements as well. Generally, the more “employee-friendly” law (state or federal) rules. Don’t forget the internal equity considerations. You will want to pay those within job families similarly (please see previous posting for more on this concept) and pay for experience, talent and other factors you have deemed important in the job design process. This proactive approach with help move you away from having to react to challenges like that one individual you feel your business cannot succeed without demanding more pay under threat to leave. A reactive approach like this might also suggest room for development in other areas of your HR program like succession planning and employee education to ensure that no one person shakes the foundation should s/he decide to leave the company. We can cover these topics in greater detail in future entries.
What the Heck are Salary Bands and Scales?
Many companies use some sort of modified “broad band” approach. Broad bands are pay ranges that support flat organizations with flexibility to grow within a position and still be compensated effectively. It helps companies really evaluate talent as the business grows and changes and helps companies more easily flex their employees across roles to suit the needs of the business. These can be coupled with incentive compensation programs also, but please use caution as you introduce incentive compensation to roles not previously treated this way. There is much that should be in place to support this type of compensation, including the ability to provide metrics to support the meeting of compensated goals. If you can’t do this, it will be hard to ensure pay equity standards are met.
We don’t see as much use of the more traditional pay scale approach that was originally designed to support more hierarchical environments. Typically you would see job grades tied to more narrow ranges with more incremental “promotions” utilized to increase compensation. Point-factor job grading systems are an example of this approach. (http://en.wikipedia.org/wiki/Point_factor_analysis) You would see something similar to this approach in collectively bargained environments.
In our next entry we will talk about compensation analyses.
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