Compensation planning isn’t everyone’s idea of a good time. But, if you do it well, you won’t have to go to court.
Employee pay is one of the most important things companies must pay attention to. Without following federal, state, and local regulations regarding employee pay, a company leaves itself open to being sued.
Inconsistent pay practices, for example, can cause employees not to get paid on a regular schedule or to get paid a different amount than what they’ve earned. Employees have every right to sue over these discrepancies.
That’s where compensation planning comes in.
What is Compensation Planning
Compensation planning is the process used to plan and organize employee pay. This can include hourly wages, salaries, commission, bonuses, and any other form of pay, like employee benefits packages or paid sick time. Human resources departments are typically in charge of compensation planning.
Compensation planning allows businesses to have clear strategies in how and when to pay their employees. It also helps lay the groundwork for benefits that many employees consider important when searching for and keeping a job, like health insurance, retirement plans, and flexible schedules.
When to Start Compensation Planning
Ideally, compensation planning should begin when your company reaches about 30 employees or five years in business, whichever happens first. It’s right around here that payroll and benefits can get a bit trickier. Compensation planning offers numerous benefits for companies that you don’t want to delay, including:
- Improving employee retention
- Boosting employee satisfaction
- Recruiting top talent
- Increasing productivity
- Preventing legal issues
That’s why I always urge business owners to start compensation planning as soon as possible. Even if you have two employees, those employees get paid and may have benefits. Therefore, compensation planning can help you strategize and outline compensation for them.
Additionally, once you begin compensation planning, it’s easier to keep your plan updated as your company grows. Adding to your strategy as you gain more employees or offer more benefits is relatively smooth sailing compared to getting started with compensation planning when you already have dozens of employees to plan for.
Compensation Planning Checklist
Consider using the following compensation planning checklist as you prepare to get your compensation ducks in a row. Even if you already have a compensation strategy in place, this compensation planning checklist can help you determine if there’s anything you might be missing or need to update.
1. Are Job Descriptions Current?
Just as your company evolves over time, so should job descriptions. As a company grows, a position can change, involving more responsibilities or splitting off some responsibilities into different positions.
Employees always have the right to be paid fairly, but about 23% of workers don’t think they are. Outdated job descriptions could be part of the problem.
Managers most frequently have job descriptions that are out of date, but outdated job descriptions can occur for any role. Unfortunately, outdated job descriptions can cause problems with compensation. It’s possible that many roles are doing much more than originally required, yet they aren’t getting paid more for those additional responsibilities.
Consider evaluating and updating job descriptions at least once a year to ensure that they accurately reflect each position’s expectations and compensation. You or your HR team can conduct a job analysis for each position. This might involve observing employees over several days, recording all tasks completed, and logging the time it takes to complete each task.
Be sure to note any variations you see with different employees holding the same position. If one employee seems to be taking on more responsibilities than another in the same position, it’s a good indicator that there’s a discrepancy in the job description that should be evaluated.
2. Are There Pay Gaps?
Pay gaps, or the differences in wages between men and women in the same role with similar skills and expertise, still exist in the modern business climate.
According to the U.S. Department of Labor, the median weekly earnings for a male with a bachelor’s degree is $1,632; meanwhile, a female with a bachelor’s degree earns $1,248. Additionally, Pew Research Center data states that, in 2022, women earned 82% of what men earned.
Obviously, workers in the same role doing the same amount of work should not have different rates of pay for any reason, including gender, race, or ability. Your compensation plan must address this and take steps to prevent it from happening.
First and foremost, ensure that your company keeps accurate records for all employees. Have a simple way, like an online account, for employees to update their credentials as they earn them. This streamlines the process for HR to verify employee credentials and ensure that workers get paid fairly for their expertise.
Next, consider partnering with an auditor to perform an external audit on your company at least once a year. The auditor will use data to help you identify any areas where wage disparities have crept into your organization so you can work on fixing them with salary increases.
Even more importantly, be sure to use that data in your planning to prevent wage gap problems in the future. For example, you might enact a policy for wage negotiation or outline advancement plans for all employees.
3. Is Compensation Evaluation Objective?
All employees are entitled to fair compensation. The best way to evaluate compensation fairly is to do so objectively. Objective evaluation methods ensure that:
- Biases do not influence anyone’s pay
- Workers in similar roles with similar skills get paid fairly for their work
- Facts, rather than opinion, are the only things that factor into pay decisions
- An organization maintains an organized pay structure
Several objective compensation evaluation methods exist, like the factor comparison method, the competitive market analysis method, and the ranking method. The point-factor method and the classification of grading method are two of the most popular forms of compensation evaluation.
The point-factor method assigns point values to job evaluation factors that affect skill, effort, and responsibility. Through this method, point values are used to more accurately gauge and compare the overall value of an employee’s role without needing to identify an employee or their merits. However, some organizations might get hung up on the challenge of creating a working point system.
The classification of grading method is a simple form of evaluation that groups jobs together based on their characteristics. Organizations using this method grade jobs based on the level of skill needed to complete them, essentially grouping employees by grade. This method is most successful when several people are involved in grading jobs to prevent it from becoming more subjective.
4. Do You Have Accurate Market Data?
Do you align your compensation with up-to-date market data? If not, you may not be paying fair market rates or providing fair benefits. Data from ten years ago is not likely to be aligned with today’s market data.
Although compensation can vary greatly by company, location, and skills for similar roles, it’s a good idea to compare what you pay to market-based pay for similar roles. This will at least give you a guideline to go by.
If your market data is more than two years old, consider updating to newer data. Paying for market data is quite common, as it typically provides the most accurate, up-to-date data. However, it can become costly to update your data with paid data every year or so.
You can also turn to free resources, like the U.S. Bureau of Labor Statistics or salary aggregators, like PayScale and Glassdoor, to give you an overview of average salaries.
5. Are Salaries Banded?
Salary bands provide a salary range for levels of each position at your company. Professionals entering the field might earn a salary on the lower end of the range, while those who have been in the position for five or more years might max out their salary at the higher end of the salary band.
Salary bands usually have different levels or grades that positions pay according to an employee’s experience, responsibilities, education, and other factors. They offer several benefits, including:
- Distinguishing pay differences for the same roles
- Helping workers understand how education, experience, performance, etc., influence their pay
- Providing clear guidance for salary expectations
- Reducing gender pay gaps
It’s important to refresh your salary bands each year according to the most recent market data you have for compensation levels.
As you update your salary bands, consider your current job descriptions, candidate requirements and expectations, and how each position ranks within your organization’s roles. From there, you can determine overall ranges for each position, further breaking them down into grades, each with its own salary range.
Also, keep yourself updated with state or local laws, as some states and cities require companies to provide workers with transparent salary ranges.
6. Are Salaries Aligned with Your Compensation Philosophy?
Every company has a choice whether it will lead, align with, or lag in compensation rates compared to the market. No choice is explicitly wrong, but it’s important to determine as early as possible where on the range your company will be. Ideally, aligning with or leading the pack will become part of your company culture and philosophy that prospective and current employees can rely on.
A compa-ratio is a percentage that helps compare your company’s given salaries to market data. You can find it by dividing a role’s annual salary by the market median salary for that position, then multiplying the result by 100. A compa-ratio of 100% means that an employee earns the equivalent of market value for their position.
Example: Joan earns $68,000 annually, and the median market salary for Joan’s role is $60,000. $68,000/$60,000 = 1.13. 1.13 x 100 = 113, so Joan earns 113% of the market value for her role. Now, if Joan earned $58,000, she’d earn about 96% of the market value for that role.
You can use compa-ratios for each employee to gauge how close their salary is to market value. Try to have a compa-ratio goal for every employee in your company, such as 90% minimum or 110%, to align your compensation with your company philosophy.
Compensation planning is a must for businesses of all sizes, especially once you reach about 30 employees. Use this compensation planning checklist every year to evaluate and update your salaries and strategies. Be sure to provide a policy change announcement to workers to notify them of any changes in their compensation structure or benefits packages.