Imagine your star employee comes to you with an ultimatum: “Raise my salary by the end of the quarter or I’ll take a job with higher pay.”
In the spirit of looking for a compromise, your organization does everything it can to improve the employee’s experience on the job, hoping that new efforts at employee recognition or culture-building will entice the employee to stick around while helping you keep your bottom line in check.
But, at the end of the quarter, your organization finds that it wasn’t enough, and one of your best employees accepts a job offer from a top competitor who offers better pay and benefits.
So, what happened? Isn’t there more to what employees want from work than just a paycheck? According to the research group The Conference Board, yes. Things like workplace culture, leadership quality, and potential for future growth all impact job satisfaction, but only once a competitive compensation threshold is met.
In other words, how you compensate your organization’s employees matters. Not only does a strong compensation strategy influence job satisfaction and retention rates, but it also communicates that you see and value the contributions your employees make to your organization.
But designing a compensation strategy that is fair and enticing is easier said than done. To help you get a leg up, we’ve compiled this guide on employee compensation to help leaders like you do all you can for your team members and avoid missing essential gaps. We’ll cover:
- What is Employee Compensation?
- Determining Employee Compensation
- 5 Tips for a Successful Employee Compensation and Benefits Strategy
- How Can an Employee Compensation Consultant Help?
It’s crucial that your organization’s compensation plan motivates employees and encourages individual advancement. If your organization is struggling to create an effective strategy, consider investing in compensation consulting services. Let’s begin!
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. Strive to financially compensate employees fairly, especially in terms of balancing the importance and difficulty of each job role and your organization’s budget.
Employee compensation has many components, giving your HR team several variables to consider. In this section, we’ll review 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?
Develop a 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 compensation strategy gives employees insight into how their contributions are valued and align 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 working hard.
The best compensation strategy also creates a structure for how employees can grow in their roles and do more for your organization. When times for advancement or change come, have a plan in place for how you will reevaluate each employee’s compensation, as well as your overall strategy.
In summary, not only does your employee compensation plan provide a concrete and tangible representation of your organization and values, but it also establishes the foundation for an improved employee experience.
The Elements of a Compensation Package
Many different elements go into individual employee compensation packages. While each package differs depending on an employee’s specific role, level of experience, and time with your organization, individual packages might include most or all of the following:
- Base salary or hourly pay: This is the fixed amount an employee is paid, received in a regular, consistent paycheck. This amount is typically determined by job level, amount of experience, and market rates.
- Variable pay: This includes any additional compensation received like bonuses, incentives, and commissions. Typically variable pay is dependent on performance.
- Long-term incentives: These elements are designed to encourage retention and loyalty at your organization. They may include incentives like stock or stock options.
- Benefits: Yes, benefits are part of the compensation mix! These benefits may include health insurance, paid time off, retirement plans, and disability coverage.
- Perquisites: More commonly known as perks, perquisites are the “extras” that employees may get when they take a job with your organization, such as a company car, continued learning funding, a new computer, and more.
Note that for executives in your organization, these elements will stay the same, but the specifics will be much more complicated. To learn more about the minutiae of executive compensation, check out our comprehensive guide!
Total Rewards Compensation: A Philosophy Explained
It’s highly recommended that your organization and HR team take a total rewards approach to employee compensation. This approach allows you to characterize different elements of compensation as direct and indirect:
Direct Compensation
Direct compensation involves all the financial ways that an employer gives back to team members. This encompasses the following compensation elements:
- Salary. Your monthly or bi-weekly fixed payment to employees represents financial stability and predictability and should align with an individual’s role and responsibilities.
- Hourly pay. Your hourly employee pay needs to be proportional to employees’ listed hours to both maintain labor law compliance and meet employee expectations.
- Incentive pay and/or bonuses. Performance-based incentives like bonuses give employees the opportunity to benefit from excelling in their roles.
- Overtime pay. Employees who work beyond their regular hours should be compensated for going the extra mile to drive results.
Each of these methods addresses employees’ direct compensation expectations and, when properly managed, can greatly influence employee performance.
Indirect Compensation
Indirect compensation includes all the ways an organization can give back to an employee without paying them directly. Examples of indirect compensation include
- Health insurance. These plans demonstrate a business’ commitment to its employees’ well-being and are a contributing factor to an employee’s loyalty and job security.
- Paid time off. Holidays, sick leave, vacation days, and emergency leave are crucial for maintaining employee work-life balance and signify your company’s commitment to rest.
- Retirement plan. Providing a 401(k) or pension plan communicates to employees that you’re dedicated to supporting their long-term financial goals.
- Diversity, equity, and inclusion (DEI) plans. These programs foster a positive work environment that values and includes all employees regardless of their backgrounds.
- Performance management styles. Your performance management approach indicates how employees will be evaluated and rewarded. Effective performance management increases a sense of purpose and achievement.
- Recognition of achievements and contributions. Celebrating employees through manager to direct recognition or peer recognition can boost employee morale and further a committed, engaged workforce.
- Wellness programs. Any program related to furthering the mental, emotional, and physical health of your employees can also aid in decreasing burnout by refreshing your workforce.
While how you directly compensate team members is certainly important, indirect forms of compensation are often the driving factors behind employee motivation, satisfaction, and overall retention. Plus, leaning into indirect compensation can also help you stay mindful of your bottom line when budgets are tight.
Determining Employee Compensation
As you already know, how you compensate an employee will often change over time. This is especially true with direct compensation, as each job and role will likely have different pay. Whether 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, only taking performance ratings into consideration often does not reveal an employee’s true market value.
By contrast, taking performance ratings in tandem with an employee’s compa-ratio reveals a fuller picture.
What is a Compa-ratio?
Sometimes referred to as the “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 their position’s salary range in your industry. To find the MP, you might need to do additional research on the job role within the larger sector and calculate the middle of the salary range.
CR (Compa-ratio) = [AS (actual salary) / MP (midpoint of pay range)] X 100
This is a simple but powerful formula when it comes to deciding how large of a pay raise is necessary to offer a competitive salary in your industry. This allows an organization to understand how an individual’s pay relates to the organization’s pay ranges and the market. So, if an 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 compa-ratio, let’s walk through an example. Let’s say the market pay range for the average receptionist position is between $35,000 and $52,500 per year, with the midpoint being $43,750 per year.
If there are five actual receptionists who earn $37K, $39K, $43K, $45K, and $50K/per year respectively, then the compa-ratios would be as follows:
- Receptionist A – 37,000/43,750 = .845 x 100 = 84.5%
- Receptionist B – 39,000/43,750 = .891 x 100 = 89.1%
- Receptionist C – 43,000/43,750 = .982 x 100 = 98.2%
- Receptionist D – 45,000/43,750 = 1.028 x 100 = 102.8%
- Receptionist E – 50,000/43,750 = 1.142 x 100 = 114.2%
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 nearly at the 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. According to ADP, “compa-ratio percentages generally fall between 80% and 120%, with 100% considered market value.” Here’s how this range might be broken up into different zones:
- 80-90% – new, inexperienced, or unsatisfactorily-performing incumbents
- 90-110% – fully competent performers fulfilling the job as defined
- 110-120% – those universally recognized as high or outstanding performers
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, that of an employee gaining experience; C and D, a fully-competent performer; and E, an excellent performer.
Time spent in a position and pay compression should also be recognized when setting hiring rates or implementing a new or revised pay system. For example, even though Receptionist A’s compa-ratio is low, if they are brand new in the job while 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 percentage 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 and the time they’ve been in the role indicates necessary changes to the individual’s pay. Ideally, an employee’s performance should match the compa-ratio range into which their salary falls.
Other Factors to Consider When Determining Pay
In addition to compa-ratio, there are other factors to consider when you determine individual employees’ pay. These include:
- Organizational values and goals. Consider how you can use compensation decisions to communicate and emphasize your organization’s larger values, missions, and long-term goals.
- Job performance in relation to job responsibilities and requirements. How an employee performs in their role compared to the expectations for that role should be a major determining factor in any changes made to their compensation. Evaluate an employee’s performance by reviewing their job description, specific wins and challenges over the most recent performance period, and how the individual has contributed to the overall success of the organization.
- Internal pay equity. How does an individual employee’s pay compare to that of their coworker in a similar position with similar levels of experience? Address any gaps or disparities you find to maintain fairness and consistency across your organization.
- Broader market conditions and salary data. To determine the compa-ratio for a role, you’ll likely need to conduct research on the industry as a whole to understand what compensation looks like for similar roles in the market. Begin by taking a look at your competitors. Examine their staff size, average yearly revenue, and missions or value propositions. You can also look at employer reviews on sites like Glassdoor for more anecdotal insights. Additionally, you can use compensation surveys for specific information on similar roles’ base salaries, increase percentages, allowances, and benefits. You can even conduct your own compensation survey with the help of an experienced consultant.
- Current compensation trends. Keeping a pulse on what employees want and need, as well as what is going on in the larger economy and labor market, can help you provide competitive pay and retain your current talent.
- Budgetary constraints. Especially if your organization is a nonprofit operating on a lean budget, you need to be mindful of the money you have to work with for COLA, pay raises, variable pay, and other adjustments.
Clearly, a lot goes into each individual employee’s compensation, and it can be difficult to manage on your own. Consider working with a compensation consultant to make the process of determining employee compensation easier and more successful in helping you attract and retain talent.
5 Tips 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. Take into account the type of job roles your organization has, your current budget, how your business is doing right now, as well as a number of other factors.
Nonetheless, there are some best practices that any HR leader can learn from. Consider the following as you design the best compensation strategy for your organization:
1. Consistently review employee compensation, including executive compensation.
It’s easy to only look at employee compensation during the end of the year or during an employee performance review. However, by auditing compensation practices at least once a quarter, your HR team has 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?
The answers to these questions should impact when compensation is reviewed. For example, high turnover is often a signal that compensation is lacking and that a re-evaluation as soon as your next quarter may be appropriate.
2. 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. 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.
3. Collect feedback on employees’ feelings about their direct and indirect compensation.
Getting feedback straight from your employees can clue you into how to improve your current compensation strategy. Consider sending out surveys to gauge what team members think of your indirect benefits. This not only provides an overview of how your employees feel but can reveal if team members are at risk of turnover.
4. Draft total compensation statements.
Outlining the direct and indirect forms of compensation that each employee receives helps current team members understand their roles and value within your organization. You can also use these statements as a key tool for recruitment so prospective employees know exactly how they will benefit by being a part of your team.
5. Foster a transparent culture.
Provide employees with plenty of information on why specific compensation decisions are made, including both the economic and financial context and your organization’s compensation philosophy. Continue to communicate compensation information as changes come and provide employees with ample chances to give feedback on their current compensation plan.
Also, encourage employees to ask their managers questions about their compensation whenever they come up. Train managers to anticipate and answer questions as they come.
Some employers even choose to take their pay communication efforts to the next level by offering employee assistance programs (EAPs) that provide financial literacy training. This can help employees with budgeting, paying off debt, and saving.
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 a compensation consultant can help.
Dedicated HR consulting firms like Astron Solutions provide a third-party perspective on employers’ current processes and how to improve them. There are specific compensation consultants with different specialties, so make sure to find one that fits your organization. For instance, nonprofits should seek compensation consultants who understand the unique nonprofit landscape.
In general, a dedicated compensation consultant should be able to do the following:
- Total rewards consulting for your base compensation strategy
- Custom survey design to help you learn what compensation you should offer for specific roles
- 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 question about this critical but often overlooked strategic element for growing organizations.
Wrapping Up
Employee compensation greatly impacts how employees feel about their jobs and their employers at both businesses and nonprofits. Use the insights in this guide to develop a strategy that accurately reflects how you value your employees’ work and will grow and evolve as your organization’s goals and priorities do.
Rely on the help of a dedicated compensation consultant to highlight areas for improvement and then take action. Your investment will pay off as you attract and retain top talent for your organization!
Want to keep learning? Check out these additional resources, hand-picked by the Astron Solutions team:
- Pay Transparency: What It Is & How to Navigate New Laws. You’ve likely heard a lot about pay transparency lately. Get the full scoop on what pay transparency is and how to comply with new laws in your area.
- HR Consulting Firms: 20+ Top Providers for Small Businesses. Does your company need guidance on other aspects of its HR strategy? Check out these top HR consulting firms and learn how to hire the right partner.
- Nonprofit Human Resources: The Full Guide & Best Practices. Nonprofits need robust HR strategies, too! Learn the ins and outs of the world of nonprofit HR and how to refine your organization’s approach.
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