7 Compensation Issues and How to Fix Them
Ignoring compensation issues at your organization can lead to unhappy workers, low morale, decreased productivity, and increased turnover. Hence, your Human Resources and/or Compensation & Benefits department must ensure the compensation you offer to your employees is appealing enough to keep your team happy. So how do you identify and fix compensation issues? Let’s find out.
Contents
Examples of compensation issues
Steps to identify and fix compensation issues
Examples of compensation issues
Let’s first discuss possible compensation problems you might find in your organization.
Internal equity
Having internal equity is essential to your organization. If you don’t have it, you risk losing employees and facing lawsuits. Internal pay equity means that you compensate employees with comparable positions or skills within your organization similarly. This includes salary and additional employee benefits and perks that come with the job. In most countries, equal pay for equal work is a legal requirement.
External equity
External equity is what outside companies are willing to pay for the same talent. Therefore, you must consider the broader market and industry when building your compensation structures. If you pay under market rates, you will not attract new employees, and you will lose the existing ones.
Perceived equity
How employees perceive the levels of internal and external equity is essential. They might be paid equitably and in line with the market but feel they are being underpaid. This can cause them to be disgruntled and less engaged.
How each team member decides whether their salary and benefits are fair varies from person to person. However, usually, these conclusions tend to be made based on a comparison with peers working in the same job and industry.
Therefore, your HR department must manage your workforces’ expectations around compensation so that your workforce feels a greater sense of connection and loyalty to the organization.
Executive compensation
Executive level and senior management employees play a vital role in your organization because they create your strategic vision and make crucial decisions. In order to keep them satisfied in your company, it’s essential to build the right overall compensation package.
However, it can be tricky to construct executive compensation packages that are fair and keep shareholders and executives happy.
Geographical differentials
Suppose your business has team members who live in different cities or even countries. In that case, salaries should vary to account for the cost of living in different locations. This is especially relevant in the current remote work debate. Should you take into account the location of your employees for compensation? If so, why, and if not, why not? How are you going to communicate the differences to your candidates/employees?
Rewarding niche jobs
It can be challenging for companies to figure out how to create fair salary ranges for emerging or highly specialized jobs.
For example, how, precisely, will you estimate the value of these jobs without a lot of information? And how will that impact other salaries in the same department or team?
Salary growth
We are in a candidate-driven market, where potential employees get a lot of power during contract and salary negotiations. Candidate-driven markets occur for many reasons but primarily result from rising demand for talent across industries – especially those seeing unanticipated profits.
This market leads to significant pay increases for those looking for new jobs but can also cause a problem for current employees who see less wage growth. Therefore, your team will need to decide how often and when your employees get salary raises. In addition to making sure salaries are fair with new employe’s salaries, you will need to reevaluate for the growing inflation levels, too.
Steps to identify and fix compensation issues
Based on the points above, it seems there are many ways you can go wrong when it comes to compensation issues. However, with a bit of planning, there are numerous ways you can fix compensation inequalities and make sure you don’t fall back into a circle of compensation problems. Let’s dive in!
1. Researching the market
In order to find out what the current market looks like and where you stand, there are a bunch of resources that you can tap into, such as Payscale, LinkedIn Salary, Glassdoor, The US Bureau of Labor Statistics, and salary and benefits information on competitors’ job postings.
There are also companies you can pay to perform a market analysis on your organization. Just remember, you must consider geographical differences in pay, so if you have remote workers, you’ll need to find local information that pertains to a certain region. That is if you decide to take geographic differentials into account.
2. Conducting a pay equity analysis
It’s imperative that your organization pays its workers fairly and that there aren’t any pay gaps based on any discrimination. This is not only a legal requirement in the United States, but it will also keep your employees motivated to do their best. For example, Pfizer, the well-known pharmaceutical company, does a worldwide annual pay equity study on their organization to assess equality for gender and minorities on base pay, merit increases, and perks/bonuses.
You should conduct a pay equity analysis within your company at least once per year to help you uncover any pay disparities. If you want to know more about doing this, check out our detailed guide with a tutorial here.
3. Tracking compensation metrics
Compensation metrics are essential because they help evaluate how well compensation meets your company’s overall goals. By measuring your compensation practices and policies, you can see whether you should improve them. Tracking metrics like compa ratio and salary range penetration will also help you spot employee compensation issues when they arise and allow you to rectify them as soon as possible.
Enrolling in a Compensation & Benefits Certificate Program will enable you to interpret data and create action plans to fix your compensation issues, make salary adjustments and achieve pay equity at your organization.
4. Considering competency-based pay
Competency-based pay is a pay arrangement that compensates workers based on their skills, knowledge, background, and experience rather than their job title. This pay structure promotes employees to reach the salary they want by improving their hard and soft skills through training.
In addition, this way of paying employees contributes to rectifying compensation issues because it increases transparency in the company since employees will better understand what they can earn and what they need to do to get to the next salary level.
5. Developing or reevaluating your compensation philosophy
A well-defined compensation philosophy helps the HR professionals in your organization design a compensation structure, manage compensation & benefits programs, determine compensation packages for new hires, and advise the team on keeping your most valuable employees.
You need to make sure that your compensation philosophy reflects what you stand for in terms of compensation. If you do it right, you’ll boost employee happiness, motivate workers to produce a fantastic product, and incentivize employees to stay and grow within the company.
6. Compensation planning
Compensation planning is a strategic long-term approach to attracting, retaining, and rewarding your staff, all while taking into consideration your company’s financial goals.
A well-thought-out compensation plan also contains the organization’s pay scheme, bonus structure, and when your team can get raises. If done right, you will remain competitive within your markets and attract and retain top talent.
7. Ensuring legal compliance across states and countries
Different US states and other countries have different rules on compensation. Compliance is very tricky because laws and regulations change constantly.
First, you’ll need to identify the areas in which the changes affect your organization. Then, you’ll need to change your internal policy, notify the company about the changes, and observe for further updates.
If you work in a large company, you probably already have a legal team and advisors that will support you with this. If you are a smaller team, you should hire experts or involve consultants to ensure everything is in order. Having experts on the team will also allow company owners and employees to ask for guidance when required.
8. Hiring a compensation consultant
It might be a good idea to hire a compensation consultant if you don’t have a dedicated Compensation & Benefits department. A compensation consultant can support your organization by setting salaries and pay grades for new positions, collecting benchmarking data on wages, and recommending bonus structures. This will be especially helpful if you have niche jobs where you can find little information online.
There are many companies and individual freelancers that offer consulting. Just make sure that they have specific experience in your industry, company size, and location(s).
9. Transparent communication
To improve perceived equity, you need to transparently communicate your compensation strategy to your staff. Also known as pay transparency, it is becoming a growing topic among tech companies. And in Colorado, it’s a legal requirement.
Probably the most radical company in its approach, Buffer, the social media toolkit company for small organizations, shares their employee’s salary information online for anyone to see. On their salary website, Buffer states, “transparency is one of our core values. We’ve found that it builds trust, holds us accountable, and can push our industry forward”. Transparency is vital if you update or make adjustments to your compensation programs.
A final word
Disregarding compensation problems in your organization can significantly impact your workers, productivity, and overall profits. Not only can you get in trouble legally for not providing equal pay for equal work, but you may have a massive turnover if there are other more appealing offers elsewhere. Therefore, to keep your team happy, you must take steps to identify compensation issues in your organization and fix them.
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