Top Compensation Best Practices and Associated Costs
Most companies prefer not to tinker with their compensation strategy — unless they absolutely must. Salary structures are difficult to get right, which is why it's tempting to adopt an "if it ain't broke, don't fix it" approach. But your compensation strategy doesn't exist in a vacuum. External factors are constantly impacting employee expectations, whether you like it or not.
For example, most incumbent employees expect to receive a typical annual raise of between 3% and 5%. However, when people switch to a new employer, they can negotiate a starting salary that's often up to 30% higher than their previous job. Talented performers are constantly fielding offers from rival employers. If you're not proactive, you face an ever-growing risk of losing your best people.
The solution to this problem? Take a hands-on approach to your compensation strategy and make sure your team members are getting what they deserve.
Top 4 Compensation Best Practices & Costs Associated
Compensation strategy is a balancing act between employee expectations and financial realities. The challenge is to build a total rewards package that's competitive but also sustainable.
There's also a cost associated with the compensation strategy itself. You'll need to consider costs such as:
- Base salaries and annual raises
- Bonuses, benefits, and other payments to employees
- Research and development costs arising from building a complex HR process
- Training and education costs involved in bringing employees and managers up to speed
- HR and leadership resources required to implement a new compensation scheme
You'll also need to think about how these costs scale up as your business grows. Developing a compensation strategy is always challenging. Here are a few best practices that will help you get it right.
1. Stay in touch with market trends
Salaries, like prices, are ultimately decided by the market. Companies that pay below the market rate are always at risk of losing their most talented staff to rivals. Companies that exceed the market rate, however, might find their salary overheads unsustainable. Your challenge is to find a balance between those extremes.
One solution is to invest in salary surveys. These surveys offer well-researched salary data for individual positions. Surveys are usually sold by third parties, with different companies providing data for various sectors.
Another option is to work with a compensation specialist. These consultants have an in-depth understanding of the market, and they will help you define a Total Rewards package that meets employee expectations.
Cost: Salary surveys can cost $500-$5,000; Compensation specialists charge consultancy rates, often as part of a broader HR service.
2. Make sure your compensation philosophy is fair
Behind every salary structure, there is a compensation philosophy. This philosophy forms part of your overall culture. Key elements here include questions like how you reward performance, whether you allow large wage gaps between positions, and how you react to external economic pressures.
Some companies will sit down and define answers to these questions in a compensation philosophy document. Formalizing your compensation philosophy can make it easier to apply the rules consistently across the entire organization.
How you approach compensation philosophy is up to you, but there's one golden rule: you must be fair. In this specific context, fairness means:
- The compensation philosophy should respect the value of each person's input
- Everyone should have opportunities to climb to a higher salary rate
- Managers should be able to follow the philosophy in a consistent manner
- The philosophy should be adaptable to changing circumstances, both internal and external
A well-defined philosophy can help with retention. Employees will have some clarity about what's valued and rewarded, which allows them to visualize their long-term future within the organization.
Cost: Time spent working with Total Rewards and Executive Management team to define policy; Additional time cascading this policy to local managers.
3. Communicate your compensation structure
Once you have a compensation structure in place, you have to communicate it to your people. Employees should fully understand your intentions and strategy, see how it relates to their jobs, and know what it all means for their future in the organization.
Sometimes, this may lead to an open discussion about salaries, resulting in some people questioning their place in the organization.
Managers should arm themselves with the proper tools to have productive, consistent conversations. That means understanding the compensation philosophy, the current state of the market, and any commercial pressures that might influence salary decisions. When employees can discuss these vital topics with their manager, they will feel a deeper sense of engagement and trust.
Plus, there's no point in hoping to evade this kind of discussion. Blocking salary discussions can be counter-productive. In fact, some employees have a protected right to discuss compensation with their colleagues. Instead, try to get the conversation started and be prepared to answer any employee concerns.
Cost: Training materials, time and effort from Marketing & Communications, Leadership, HR, and management teams.
4. Recognize achievement
Workers in every sector have been through a period of unprecedented uncertainty and stress. Furloughs, remote work, socially distant offices – all of these factors have placed extraordinary weight on each employee's shoulders.
That's why it's more important than ever to have a formal recognition process in place. Your people deserve celebration for individual achievements, whether in the form of a cash bonus or a desirable perk. Teams also deserve recognition, as success is often the result of an outstanding group effort. Awards, perks, and company-sponsored social gatherings are a great way to promote team spirit.
In terms of compensation strategy, it's best practice to tie any bonuses to clear, pre-agreed targets. This allows employees to calculate the total compensation available to them. They can then make an informed decision if another opportunity comes knocking.
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.
The Cost of Turnover
The cost of employee turnover is often somewhere in the region of 33% of the departing employee's salary.
The true cost may be much higher. When a top-tier employee departs, you're losing so much more than just a worker. You're losing someone with specialized knowledge, highly productive skills, and unique relationships with clients and colleagues.
That's why it's so important to get your compensation strategy right. With a little planning and foresight, you can find a sustainable salary structure that keeps your employees engaged.