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Top 3 Compensation Best Practices & Costs Associated

Posted on September 14, 2015
Cicely ClaytonWritten by Cicely Clayton | Email author

The Cost of Turnover Vs. Compensation Best PracticesPicture it for a moment: it is 2 pm on the nose on a Friday afternoon and one of your prized, high potential employees is all of the sudden taking a phone call in their car. Given what you know of their work effort and typical behavior, this is definitely not normal. While it could be a family matter, the wheels in your head can’t start turning about the alternate possibilities. As you walk by their late model Toyota Prius with a cell phone in one hand and what looks to be their resume in another, you might start asking yourself, ‘Oh no! Are they taking a call from a Recruiter?’.

If three to four weeks from now these strange happenings manifest as a resignation letter on your desk, you will soon be faced with the cost of losing an employee – and a star player at that.  Their resignation hurts. To make matters worse, it’s impacting the business bottom line. I am sure you are well aware of the many issues that drive turnover and yield unwanted costs for businesses. But did you know that there is a less costly and smarter approach to mitigating potential turnover costs?

The Top 3 Compensation Best Practices & Costs Associated

Prior to working together, my clients many times overlooked and underestimated the importance of compensation best practices as an ongoing and visible part of their overall HR strategy. Often times, companies feel that they are paying employees fairly or competitively. The reality is though that they do not have a strong basis for this belief. In turn, I have had the pleasure of showing my clients the source for improved turnover by having a solid set of compensation-related best practices. Here’s my top three compensation best practice recommendations and their associated costs below.

1. Establishing Market Informed Structure and Defined Compensation Philosophy

When my clients establish and administer a solid, market informed compensation structure and define their compensation philosophy to stay current with pay trends, they signal to their employees that they value them. By having a compensation structure in place that is regularly aged and updated, and considerate of market pay mix (base and variable compensation) when designing and updating jobs, my clients greatly increase their chances of retaining their talent.

Now that the economy is steadily recovering, companies have more resources and are using variable pay to compensate all levels of the organization in an attempt to drive high levels of performance. Additionally, when a compensation structure is in place and used consistently throughout the organization, making pay decisions for new hires, promotions and equity adjustments becomes easier. With this in place, you then have the tools to educate your candidates and employees on why you pay what you pay as it relates to various compensable factors.

staygoIf an organization neglects to install a market structure and define a strong philosophy, star employees become more easily poached when Recruiters come calling and provide an idea of what they could be making. Then when that organization seeks to hire new replacement talent and a structure is still not in place, they run the risk of disturbing internal equity and losing top candidates who are savvy enough to ask about salary grade information as it relates to their offer and overall pay mix.

Cost: Time and effort from the Total Rewards and Executive management team and the investment of salary surveys ($500 to $5,000).


2. Well Communicated Compensation Plan/Structure

Once the compensation philosophy is established and vetted by executive management, it is critical that HR, your compensation partner and the management team communicate it to the broader employee population. It is suggested that employees fully understand the overarching strategy and approach, how it relates to their jobs and what this means as they promote up through the organization. Now that the OFCCP has released its ruling on Pay Transparency, government contractors can no longer penalize or discipline employees for sharing pay information amongst themselves, so HR might start experiencing employees challenging their rewards package. Managers should be armed with the proper materials and tools to have productive, consistent conversations as it relates to their team’s salary range and midpoint or market reference point. Being able to help the employee understand why they are paid and what they are paid deepens engagement and trust with their manager.

If the compensation philosophy and structure details are not communicated in some form, the employer puts at risk employee engagement, which many time leads to turnover. Moreover, we live in the information age where employee can easily access salary information from a number of online sources and tap into their peer networks as well to see what their friends and colleagues are making for similar work. Keeping employees in the dark about how they are compensated and why can lead to distrust and the cloaked 2 pm phone call on Friday afternoon.

Cost: Training materials, time and effort from Marketing & Communications, Leadership, HR and management teams.


3. Recognition from Management

Over the past couple of years, almost every industry is rebounding and experiencing stronger demands for product offerings. This means that the workforce is working hard to deliver products in a faster, more efficient and superior manner to keep up with business requirements. The successful execution of such measures requires employees to go above and beyond the normal call of duty to work on special projects or think outside of the box to get a large amount of work done either early or one time. When it’s all said and done, employees are aware of the sweat equity they put into the work, and greatly appreciate a little something known as recognition from management.

The great thing about having a formal recognition plan and budget in place, is that it does not cost the company a great deal of money. For example, recognition can come in the form of a spot award, gift card, lunch, a free vacation day, a parking spot close to the front of the building, or the opportunity to work remotely on a periodic basis. The idea is that management recognizes the extra effort and some form of a pat on the back is many times all the employee is looking for in these instances.

When management neglects to recognize the hard work of its staff during demanding work seasons, it implies that either they are not aware of the hard work from their team put forth or they do not think it is worthy of being recognized. Managers will many times get labeled as bad, uncaring or ineffective in these instances, and we are all aware the saying, ‘employees don’t quit companies, they quit bad managers.Recognition is key in keeping the workforce feeling good about the hard work they do, deepening engagement, team comradery and creating an environment that is fun and inviting to be in on a daily basis. All of these things can add up to less turnover.

Cost: Time and effort from HR and your Total Rewards partner to create strategy and train management, effort from management to learn about the additional work of the team and $15-$65/employee.


Cost of Turnover

To conclude, the cost of turnover is not getting any cheaper. It is estimated that turnover costs companies anywhere from 20% to 30% of the former employee’s salary until new talent is identified and is officially up to speed in the new role. And with the average time to fill a job estimated at two to three months plus another three to six months to get employees ramped up in role, I can hear the dollars adding up very quickly. Times this figure by the average rate of turnover, and money is literally flying out the window! When you compare the real cost of turnover versus the cost of implementing and sustaining well defined compensation best practices, the smart and best choice is obvious!

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