As an HR leader for your organization, you know that employee compensation is not just something you determine when you hire a new team member and then forget about. In fact, how you compensate a team member should reflect their performance and will often change throughout their journey with your organization.
Whether you’re conducting performance reviews or moving an individual from one position to another, redefining how an employee is compensated is critical— especially if you want to increase employee retention and organizational growth. After all, without fair and enticing compensation, people may start to leave.
Since 1999, we at Astron Solutions have helped growing organizations, including businesses and nonprofits alike, streamline their HR strategies and better manage employees. We’ve written this guide on employee compensation to make sure that leaders like you are doing all you can for your own team members and not missing any essential gaps. Here’s what we’ll be going over:
- What is Employee Compensation?
- How to Measure Employee Compensation
- Best Practices for a Successful Employee Compensation and Benefits Strategy
- How Can an Employee Compensation Consultant Help?
It’s crucial that your organization’s compensation plan both motivates employees and sets the foundation for their own individual advancement. Without your hardworking staff members, your organization would not be where they are now. Ready to learn more? Let’s jump right in!
What is Employee Compensation?
Employee compensation involves all the ways your organization gives back to team members for their hard work. The obvious form of compensation is pay, whether it’s salaried, hourly, or sales-based. It’s important that how much you financially compensate an employee is fair, especially in terms of balancing the job role itself and your organization’s budget.
On top of this, employee compensation has many other components, adding additional layers of consideration for your HR team. In this section, we’ll be reviewing exactly why creating a dedicated employee compensation strategy is so important, as well as the different forms it might take.
Why is Employee Compensation important?
It’s critical that you develop a strong and clear strategy for how employees are compensated for their work with your organization. However, there’s more to it than just ensuring that everyone is fairly compensated.
A fleshed-out and comprehensive strategy should give employees insight into why their contributions are valued and align them with their job roles. With a clear understanding of what their jobs are, why they’re important, and how much value they bring, employees are further motivated to continue doing hard work.
Your employee compensation strategy should also create a structure for how employees can grow in their role and do more for your organization. When those times come, make sure you have a plan in place for how you will reevaluate each employee’s, as well as your overall organization’s, compensation strategy.
In summary, not only does your employee compensation plan provide a concrete and tangible representation of your organization and values, but it also sets the foundation for an improved employee experience and overall growth.
The Different Types of Employee Compensation
Coming up with the best way to compensate your employees isn’t just about the numbers. The types of employee compensation are often broken down into the following:
- Direct compensation. This involves the financial ways that an employer gives back to team members. This comes in the forms of salary, hourly pay, incentive pay, and/or bonuses or overtime pay. For instance, some jobs are commission based, incentivizing staff to do more in order to get paid more. Allowances like travel allowances, food allowances, and relocation allowances can also be included.
- Indirect compensation. This involves all the ways an organization can give back to an employee that is not paid directly to them. For instance, this can be health insurance; paid time off; retirement plan; diversity, equity, and inclusion plans; performance management styles; recognition of achievements and contributions; internal culture; and more!
While how you directly compensate team members is certainly important, it’s often found that the indirect forms of compensation are the driving factors of an employee’s engagement, satisfaction with the job, and your overall retention rates.
In fact, it’s highly recommended that your own organization and HR team take a Total Rewards Approach to employee compensation, carefully considering both direct and indirect forms. The challenge now comes in how to actually measure employee compensation.
How to Measure Employee Compensation
As you already know, how you compensate an employee will often change over time. This is especially true with your direct compensation, as each job and role will likely have different pay. So, when you’re advancing an employee or simply moving them to a new role, rethinking their compensation is a necessary process.
It’s easy to think that the best and fairest way to approach direct compensation is to look at the employee’s current performance. However, taking into consideration an employee’s performance rating alone often does not reveal the true market value of that performer.
In fact, the performance rating taken in tandem with an employee’s compa-ratio reveals a fuller picture.
What is Compa-ratio?
Sometimes referred to as “compensation” or “comparison” ratio, the “compa-ratio” is the percentage obtained by dividing the actual salary (AS) paid to an employee by the midpoint (MP) of the salary range for that position. To find the MP, you might need to do some additional research on the job role within the larger industry and calculate the middle of the salary range.
CR (Compa-ratio) = [AS (actual salary) / MP (midpoint of pay range)] X 100
This is a very simple but powerful formula when it comes to deciding how large of a pay raise an employee needs at a given time. This allows an organization to understand how an individual’s pay relates to the organization’s pay ranges and the market. So, if the individual’s compa-ratio comes out to 100%, then the individual is already being paid what a competent performer should be.
How to use Compa-ratio
To better understand this, let’s walk through an example. Let’s say the market pay range for the average receptionist position is between $20,000 and $28,000 per year, with the midpoint being $24,000 per year.
If there are five actual receptionists who earn (respectively) $21K, $23K, $24K, $26K, and $28K/per year, then the compa-ratios would be as follows:
- Receptionist A – 21/24 = .875 x 100 = 87.5%
- Receptionist B – 23/24 = .958 x 100 = 95.8%
- Receptionist C – 24/24 = 1 x 100 = 100%
- Receptionist D – 26/24 = 1.083 x 100 = 108.3%
- Receptionist E – 28/24 = 1.167 x 100 = 116.7%
Here are five clear percentages. The first two compa-ratios are below what a fully competent solid performer should be paid, the middle figure is exactly at midpoint, and the latter two are above the midpoint for the given position.
So how does one use compa-ratios to determine compensation? While pay scales always have a defined range, so too do compa-ratios. As outlined on the website of Australia’s National Remuneration Centre, there are usually five zones of compa-ratio, each associated with a pre-defined level of performance. A commonly accepted range for compa-ratios is 80% to 120%, which divided into 5 zones are:
- 80-87% – new, inexperienced, or unsatisfactorily-performing incumbents.
- 88-95% – those gaining experience but not yet fully competent in the job.
- 96-103% – fully competent performers performing the job as defined.
- 104-111% – those consistently performing the job at a level higher than what the job definition requires.
- 112-120% – those universally recognized as outstanding performers, both inside and outside the organization.
Each one of these zones is associated with a pre-defined level of performance, with 100% representing fully competent performance in the job. If we use these zones to compare the salaries of the aforementioned five receptionists, Receptionist A would be making a salary comparable to that of an unsatisfactorily-performing employee; B and C, that of a fully-competent performer; D, a higher-level performer; and E, an excellent performer.
Time in position and pay compression should also be recognized when setting hiring rates or implementing a new or revised pay system. Even though Receptionist A’s compa-ratio is low, if they are brand new in the job and Receptionist E has been in the role for 15 years, the pay difference makes sense.
However, if the organization has a true pay-for-performance focus, then compa-ratio is often used to determine the % adjustment, assuming the goal is to move to the midpoint. This would mean that an employee with low compa-ratio and outstanding performance should have their pay accelerated towards the midpoint.
Comparing these five percentages with the actual performance of each receptionist along with the time they’ve been in the role will indicate necessary changes to the individual’s pay. Ideally, an employee’s performance should of course match the compa-ratio range into which their salary falls.
Best Practices for a Successful Employee Compensation and Benefits Strategy
How you approach your own employee compensation and benefits plan will likely depend on your unique situation and organization. You have to take into account the type of job roles your organization has, your current budget, how your business is doing right now, and a number of other factors.
Nonetheless, there are some best practices that any HR leader can learn from. Consider the following:
- Take a Total Rewards approach. As you know, it’s often the indirect forms of compensation that truly retain employees and provide a meaningful and valuable experience. Especially when budgets are tight, a total rewards approach to compensation provides ways other than direct, financial pay and bonuses to help your organization attract and retain its talent.
- Consistently review employee compensation. It’s easy to only look at employee compensation during the end of the year or during an employee review. After all, these are common times when you have to rethink salaries and pay going forward. However, it’s beneficial to review compensation practices at least once a quarter, giving your HR team time to make any necessary adjustments. If you’re wondering when a good time to review your current compensation plan is, consider asking yourself these questions:
- How would you estimate your organization’s current retention rate?
- How many paid employees currently work at your organization?
- What has been your historical employee turnover rate?
- How difficult was it for your team to adapt the last time you lost a member?
- Conduct audits on a regular basis. Additionally, HR should audit compensation on a regular basis. There are any number of changes that could impact salaries and the need to make adjustments for employees.
- Research the compensation strategies of organizations comparable to your own. If you’re unsure of how to fairly compensate your own team members, taking a look at your competitors can be helpful. Try to examine staff size, average yearly revenue, and missions or value propositions of similar organizations. You can even try and do some online research on employer review websites like Glassdoor.
- Conduct surveys of your employees’ feelings on their direct and indirect compensation. Getting feedback straight from your employees can also clue you into how to improve your current compensation strategy. Consider outlining surveys on what team members think of your indirect benefits. This not only provides an overview of how your employees feel, but can determine team members at risk of turnover.
- Draft total compensation statements. Directly outlining the direct and indirect forms of compensation that each employee receives can not only help current team members understand their roles and value within the organization, but also be a key tool for recruitment. This way, prospective employees know exactly what they could benefit from by being a part of your team.
- Foster a transparent culture. While in many cases you shouldn’t be advertising each employee’s salary to everyone, you should still be taking the steps to create a transparent culture within your organization. Provide employees with ample chances to give feedback on their current compensation plan and continue to share compensation information as changes come.
As you begin to reevaluate your employee compensation plan, you need to come up with ways to create a sturdy structure and reliable process, not just a one-time fix. This means not only coming up with the components of your current employee compensation strategy, but also determining the ways you’ll continue to review and improve it. Only with a long-term strategy in place can your organization start to truly grow and meaningfully engage employees.
How Can an Employee Compensation Consultant Help
Your employee compensation plan is not something you can just come up with on the spot. It takes careful research of your larger industry/field, an in-depth look at your employees and their roles, and consideration of your current organizational standing and budget. That’s where an employee compensation consultant can help.
Dedicated HR consulting firms often help organizations by providing a third-party perspective on their current processes and how to improve them. There are specific compensation consultants with certain specialities, so make sure to find one that’s best for your type of organization. For instance, nonprofits should seek consulting from those who understand the unique circumstances and laws that come with these types of organizations.
In general, a dedicated compensation consultant should be able to do the following:
- Total rewards consulting for your base compensation strategy.
- Specialized strategy development for executive and sales-based compensation.
- Incentive and variable compensation program development to address particular goals.
- Policy development guidance to help HR departments effectively administer their new compensation programs.
If you have questions about compensation consulting services or are even unsure whether consulting is the right move for your organization, reach out to us at Astron Solutions. We’ll be happy to answer any questions about this critical but often overlooked strategic element for growing organizations.
Employee compensation is a vital component for any HR strategy of businesses and organizations of any size. Make sure you not only develop a strategy that accurately reflects how you appreciate and value your employees’ work, but also grows and evolves as your organization’s goals and priorities do.
Take the time to flesh out your own strategy and even partner with a dedicated compensation consultant to really highlight areas for improvement and take action.
To continue your research on how to best compensate and manage employees, we recommend exploring these additional resources:
- Nonprofit Employee Compensation: Understanding the Essentials. If you work in a nonprofit organization, you understand that there are special considerations when it comes to the pressures and circumstances of the field. Learn more about it in this guide!
- Astron Solutions’ COVID-19 Pulse Survey Results. It’s likely that your own organization has been affected by COVID-19. Learn how other organizations and businesses are reacting with the results from our Pulse Survey.
- Compensation Consulting Firms: 12 Top Picks for Any Sector. Are you looking for a dedicated compensation consultant to help you optimize your internal processes and better compensate your employees? Check out this guide for the top picks for any sector.