7 Compensation Best Practices I Wish I Knew From Day One

Lars Lofgren Avatar
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My background in startups introduced me to compensation management. Because the nature of a startup usually requires one person wearing multiple hats, I quickly became immersed in compensation management long before I understood what it took to get it right.

Here’s a straightforward list of compensation best practices I wish I knew when I first started managing compensation. 

1. Refresh Pay Ranges Annually

Pay ranges are the minimum and maximum amounts an employee can earn within that pay range. You can set pay ranges for departments, similar roles, or specific roles, depending on how granular you want them to be. As an employee gains experience with your company, earns a credential or new skill, or displays outstanding performance, they can work their way up in their pay range.

Pay ranges can also help candidates applying for positions know what pay they can expect as a new hire and as they move further along with the company. Candidates can compare your pay range with similar positions they’re interested in to ultimately determine their best choice, so it’s crucial to ensure you’re paying fairly.

That’s why I advocate for annual pay range refreshes using up-to-date market data for comparison. Yes, each and every pay range in your company should be reviewed once a year. 

Several free pay aggregators exist on the web to help you compare, like Indeed and PayScale. You can also use the U.S. Bureau of Labor Statistics wage data to view salary information for more than 800 listed jobs. You can gather more comprehensive and up-to-date data from SHRM Benchmarking, a paid tool for various business metrics.

Management should also be allowed to request a review of an employee’s salary at any time by submitting a request to the company’s HR department. If the company doesn’t have an HR department, management should handle reviews when they deem them necessary, in addition to the mandatory annual pay range review. 

2. Use a Simple Payroll Budget

The thought alone of creating a payroll budget can feel intimidating. I get it. But I promise it doesn’t need to be complicated.

In fact, I enjoy having a simple payroll budget that doesn’t require intricate calculations, which is not something you’ll usually hear from other CEOs. But hear me out.

A payroll budget becomes the guideline for your company’s compensation. It doesn’t necessarily account for every single penny. If you obsess over every detail, you’ll be missing the overall picture, which is that a payroll budget gives you a picture of your finances rather than listing each payroll expense.

All that complicated stuff is what your payroll service handles. A payroll budget, however, can be as simple as a spreadsheet that deducts each employee or contractor salaries, benefits, and additional annual costs from your budget. 

I wish I had known how simple this could be from the start so I could have avoided the complicated tracking systems and headaches I encountered earlier in my career.

To keep things really easy at Stone Press, I use a payroll budget spreadsheet that makes calculations for me. I also use a 25% rule to estimate the cost of taxes and benefits rather than inputting precise numbers. 

When considering your budget for open positions, the key is to budget for the absolute maximum you’re comfortable with for each role. This leaves you with some wiggle room throughout the year rather than having to cut back elsewhere to fit everything into your budget.

3. Benchmark Salaries High and Forget COLAs

Cost of living refers to how much it costs to live in an area based on the cost of housing, transportation, and other necessities. 

When you have a team of remote workers, they’ll all experience different costs of living. For example, World Population Review notes that Hawaii has a significantly higher cost of living than the national average, while Mississippi offers the lowest cost of living in the country.

Organizations often include cost of living adjustments (COLAs) when figuring out salaries. COLAs help adjust salaries based on where someone lives and that location’s cost of living. Therefore, someone in Hawaii might be paid more for the same role than someone living in Mississippi.

But COLAs aren’t necessary. 

A simpler way to handle these cost of living variations is to benchmark salaries high based on the most expensive cities in the country, like New York City. This works for us because it ensures that we’re paying more than what’s expected, regardless of where an employee lives, rather than dealing with complicated COLAs—which would need to be updated annually, by the way—and salary structures. 

4. Create a Clear Compensation Philosophy

Every type of compensation you give your employees, from salary to retirement plans, should align with your company’s compensation philosophy. Simply benchmarking salaries high isn’t where it ends. You also need to consider where your full benefits packages fall on the scale of lagging, matching, or leading the market.

Let me explain:

  • Lagging the market means that your company is okay with paying a little lower than the typical salary and benefits as competitors. Maybe you pay a salary that’s in line with competitors, but your benefits package isn’t quite up to par.
  • Matching the market means that your company strives to match market data for overall compensation, making it a solid competitor for people looking to fill open positions.
  • Leading the market positions your company ahead of the pack. These are the companies that go above and beyond usual salary and benefits expectations.

Nailing down where you want your company to land compared to the market right in the beginning can keep you on track each year when it’s time to review compensation. 

5. Set Boundaries for PTO

Thinking of offering unlimited PTO? I believe unlimited PTO is usually a bad choice, especially when it comes to simplifying compensation practices.

Unlimited PTO can get messy quickly. Employees may take advantage of it, and managing it can be a nightmare for HR.

In contrast, setting boundaries for PTO effectively lays ground rules for everyone to follow. For example, we give everyone three weeks of PTO a year to use as they want to. It couldn’t be simpler to oversee its usage and budget for it because it’s built right into each employee’s compensation package.

When building out your PTO policy, determine clear boundaries out of the gate. Consider:

  • How much PTO should I offer?
  • Should I use a lump sum or accrual system?
  • Can employees roll over their PTO to the next year?
  • When can new employees begin using PTO?
  • What process should be in place for requesting and approving PTO?

Be sure to check your state PTO laws to ensure your PTO policy complies.

6. Focus on Retention

What’s the best way to know if your compensation practices aren’t working? A high turnover rate is always a good signal.

High turnover rates tell you that employees aren’t happy, and most of the time, it’s because they aren’t getting paid enough. Whether their base salary is too low or they don’t get enough benefits, employees will eventually go somewhere else that offers them more.

Therefore, nailing down retention is crucial from the start. It’ll save you a lot of time and money in recruitment and training efforts later. One of the best ways to keep employees satisfied and motivated is by giving them the pay they deserve and the benefits they want and need.

The perks you offer depend on how your business operates and what matters most to employees but may include:

  • Flexible scheduling and time off
  • Remote or hybrid work days
  • In-house childcare or childcare reimbursement
  • Tuition reimbursement
  • Profit sharing
  • Retirement plans
  • Paid professional development opportunities
  • Clear goals and resulting bonuses
  • Medical insurance
  • Solid onboarding and mentorship
  • Wellness plans

Research benefits packages at similar companies to determine what to include in yours.

7. Communicate Transparently with Workers

Everyone seems to talk about how to manage compensation and how to make sure workers get what’s rightfully theirs. But the importance of involving workers in the conversation and process is not as openly discussed.

Workers have the right to know when compensation changes happen and when new ideas form. They also have the right to provide feedback before and after any new changes occur.

Throughout my career, I realized how necessary this piece is for employee satisfaction and retention. No one wants to work somewhere they don’t feel heard or valued. That’s why I’m a stickler for transparent announcements about PTO policy changes, benefits package updates, and anything else that affects employee compensation. 

It’s one thing to change a policy, but it’s another to give your employees a voice when updating that policy. After all, it’s those same employees the policy affects. 

When considering or implementing a compensation change, leave enough time—and by time, I mean several weeks, not a few days—to gather and evaluate feedback. Then, provide a timeline to employees detailing when they can expect changes to take place.

Last thing: Use a Payroll Service

One compensation practice I was aware of from day one was relying on a payroll service. Since then, payroll services have only gotten more intelligent and helpful, so there’s absolutely no reason not to use one. 

Some of the best payroll services, like Gusto and ADP, help you comply with state and federal compensation laws, process payroll timely and accurately, and automate taxes. Plus, today’s payroll services integrate with just about any other tool you use to keep everything conveniently on one platform.

Yes, you’ll need to make room for a payroll service in your payroll budget. But it’s a small price to pay for all the perks they bring to your payroll process.

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