I’d seriously consider implementing compensation management once you have 10 full-time employees on your team. Yes, it sounds early when your company is barely larger than a small team, but the longer you put off compensation management, the more difficult it will be to get the ball rolling.
And, trust me, compensation is not something you want to start off on the wrong track. Beginning as soon as possible can set you up for long-term success.
What is Compensation Management
Compensation management includes planning, implementing, and overseeing strategies regarding pay and benefits for employees.
The overall goal of compensation management is to ensure fair compensation throughout an organization, but it offers numerous other benefits, too, like reducing turnover, drawing in top talent, and encouraging company growth.
Key Responsibilities of Compensation Management
Compensation management holds several responsibilities within an organization, including:
- Promoting pay equity: Unexplainable gaps in pay highlight your company as one that doesn’t take pay equity seriously. In turn, it can become difficult to attract and retain workers. With the right compensation management strategy, pay is fair and balanced for all employees.
- Keeping payroll under control: A payroll budget helps spark compensation management, and the process of compensation management helps organizations stick to that budget. Going overboard with benefits or not capping salaries with ranges can quickly break a budget, but compensation management is responsible for preventing this from happening. For instance, HR allocates parts of a payroll budget to specific compensation, like salary and healthcare, to keep all payroll expenses within a budget.
- Adhering to a compensation philosophy: Your company’s compensation philosophy denotes how you compare to similar companies regarding pay. Do you lead, lag, or match the market? Once you decide, compensation management keeps you aligned with your philosophy by offering relevant pay and benefits.
- Ensuring compliance: Compensation management determines what local, state, and federal laws regarding compensation a company must comply with and keeps it in compliance with updated compensation practices. In the absence of a solid compensation management strategy, companies might not meet regulations regarding paid leave, minimum wage, or pay frequency, putting them at risk of legal troubles.
An organization prioritizing compensation management should find that retaining and attracting talent is easier and that current employees feel satisfied with compensation practices.
However, compensation management takes work, whether you have a dedicated team to handle it or not. Only through regular reviews and improvements can compensation management succeed, making it a lasting commitment for organizations.
6 Steps to Get Started with Compensation Management
Not sure where to start with compensation management? The steps outlined below are simple ones you can take to begin and improve your compensation management practices.
1. Create a Payroll Budget
A payroll budget is the single most important tool in your compensation management toolkit. It defines how much you are able and willing to spend on payroll and becomes a good point of reference to determine how much more you can offer employees or how many new positions you can afford to fill.
Generally speaking, it’s best to set a payroll budget at 30% or less than your gross revenue.
I’m all for simplicity when it comes to creating a payroll budget. There’s no need to use a complicated system with bells and whistles. I use a minimalist approach with a spreadsheet that tracks payroll costs for each employee, listing their name, type of employment, department, title, and salary, while leaving a column for notes, if needed.
Then, I add the amounts paid to contractors, which is important to remember to include in the budget if you use contractor services.
When creating your payroll budget, don’t forget to make room for benefits like FTO or PTO, retirement plans, and health insurance plans. Benefits are necessities, but they also increase the amount you pay for each employee and, therefore, should go straight into your budget.
I also like to make this part as simple as possible. Instead of accounting for every penny in benefits and expenses outside of a salary, I add 25% to each employee’s annual salary. So, an employee making $100,000 would be worth $125,000 in our payroll budget.
If you’re just starting with a payroll budget, be sure to check it for accuracy every week or so for the first couple of months. Then, continue to review it monthly. Look for data mistakes and update any estimates with real numbers to keep your budget as precise as possible throughout the year.
2. Revise Job Descriptions
Do you notice people in certain positions in your company completing tasks originally assigned to other positions?
This happens more often than you might think, but it’s a natural progression in most growing organizations. As new positions open up, others shift around, and tasks handled by one role might make more sense for a different role.
The problem with this is when job descriptions don’t accurately reflect what people in these positions do. Outdated job descriptions can lead to outdated salaries and confusion for new hires with expectations for their role based on the description of the job they applied for.
At least once a year, analyze and update job descriptions. Companies can determine whether a job description is accurate by observing people completing their typical tasks over several days or weeks.
If you don’t have the bandwidth for observations, consider sending out surveys to workers to gather information about their daily and weekly responsibilities. Or, have workers fill out a log daily for a couple of weeks, listing each task they worked on and how long they spent on it.
You might also task managers or department heads who are very hands-on with their teams and understand each person’s role well to refresh job descriptions based on what they see and experience each day.
3. Refresh Salary Ranges
A salary range is the minimum and maximum salary a person in a specific position can earn. Salary ranges ensure fair pay for a role, as companies can increase a person’s pay based on experience or skills while adhering to a payroll budget.
If salary ranges aren’t updated regularly, they might restrict workers from earning a fair amount. For example, a salary range that has not been reviewed since five years ago may not provide a fair salary to someone in that position today.
Refreshed job descriptions can make refreshing salary ranges easier. With accurate roles and responsibilities listed within each job description, your company can determine whether a current salary is fair for the current tasks required in a role.
Generally, pay range spreads are usually somewhere between 25% and 40%, meaning that there is a 25% to 40% difference between the minimum and maximum salary amounts in a range. Usually, management and executive positions have a wider pay range because there’s more room for growth and long-term employment within those positions.
Say a salary range has a starting salary of $80,000. With a 25% spread, the maximum salary would be $100,000 but would jump to $112,000 with a 40% spread.
When HR updates salary ranges, it typically pulls salary market data to determine the average salary for a position. Then, depending on whether your company wants to lead, lag, or match the market in compensation, HR uses that average to create salary ranges.
A company matching typically uses the average as a midpoint for a salary range, but a company leading the market might place that average closer to the start of a salary range.
HR also takes the company’s payroll budget, the position’s benefits, and room for growth within a position into consideration when seeing salary ranges.
4. Get Feedback from Your Team
As you build your compensation strategy, be sure to bring your team along for the ride. They’re the ones the company pays, so they should get a say in how it works.
In other words, when you’re outlining paid time off, revising job descriptions, and creating salary ranges, gather feedback from the workers that each compensation change or policy affects. Do they think the policies are fair? Do they have suggestions for how to make compensation better?
Host meetings, send out surveys, and have regular conversations with your team so that everyone stays on the same page about compensation.
5. Review Compensation Annually
Once you create a compensation package, the most difficult part is out of the way, but the process is far from over. Now, it’s up to HR or whoever is in charge of compensation management in your company to stay on top of compensation practices.
In most cases, reviewing compensation every year is a must. Annual reviews make aligning compensation with current market rates easier while ensuring no gaps or errors exist in the compensation management process.
During your annual compensation review, evaluate market data, assess current pay ranges, and determine whether benefit packages still work for your current staff. As always, be sure to communicate any adjustments with the entire team.
6. Get Help from a Payroll Service
As your payroll grows and compensation management needs expand, a payroll service can be an invaluable tool for keeping you on track and investing in your company’s future.
The best payroll services save HR time on tasks that can easily be automated, like tracking payroll taxes and ensuring compliance with local, state, and federal law. Many also provide online services for employees to check their pay stubs or tax information.
Over time, your payroll service can also help you stick to your payroll budget as it continues to track how much money is being spent on payroll.
A successful compensation strategy starts with proper planning, like outlining a simple payroll budget and squaring away accurate job descriptions and salary ranges. With the initial setup out of the way, your compensation management strategy should be relatively smooth sailing, thanks to annual reviews and a solid payroll service.
