Compensation management is more than just paying employees for the work they do. It also ensures that your company stays within its budget, pays employees fairly, and offers enough benefits to retain employees.
When managing compensation, employees should strive to meet the following objectives:
- Pay equity
- Low turnover
- Healthy payroll budget
- Talent attraction
- Competitive within the job market
- Pay compliance
- Employee motivation
HR departments know what these terms mean and why they’re important. But does your company know when it’s hit these objectives?
Possibly not. That’s a little tougher.
Here’s what you should look at to determine when your company has hit its key compensation management objectives.
1. Job Offer Close Rate
Your job offer close rate shows how many potential candidates you’ve interviewed end up accepting your offer. As you’d probably guess, this should be a high number, around 80% or more. That means that at least 4 out of 5 people accept the job offers you give them.
Now, if more than 20% of people are rejecting your offers, that could tell you:
- Your salary offer isn’t high enough
- The role has responsibilities outside the usual scope of that position
- You didn’t offer enough benefits
- The candidate doesn’t feel that your company is the right fit for them
In most of these scenarios, compensation is the underlying issue. Unfortunately, once you get to the point of offering a job and having your offer declined, you’ve already spent a lot of time and monetary resources, only to have to restart the process.
If you’re getting plenty of applications submitted, but candidates tend to drop off when they receive your offer, something’s not adding up, and it’s likely that it’s your compensation. You’ll need to go back to the drawing board with compensation planning to solidify comp packages that applicants want to accept.
At this point, compensation analysis is your best friend. By analyzing the current market, you’ll see whether the compensation you offer—including salary and benefits—is at or below the market.
If, after making over your compensation package for new candidates, you notice a jump in job offer closings, congratulations—you’ve successfully attracted new talent by managing compensation wisely.
2. Exit Interviews
Exit interviews happen when someone decides to leave your company, offering incredible insight into why that person chose to leave. An exit interview can tell you whether a personal situation might have impacted the candidate’s resignation or whether something within the company wasn’t aligning with the candidate’s needs.
Exit interviews don’t happen at every company, but they should, especially at companies with high turnover rates. These interviews can tell you everything you need to know about why turnover happens, how well the company meets its employees’ needs, and how the company’s culture affects employees positively or negatively.
Use exit interviews to ask specifically about compensation to determine whether pay and benefits are where they need to be. You can even do this in a roundabout way by asking the employee how their colleagues feel about their compensation. I personally do this to prevent employees from feeling like they’re being put on the spot.
The information you gather during an exit interview is so much more telling than the turnover rate if you ask the right questions. Turnover rates vary between industries, business size, and locations, but the details you get from an exit interview go straight into the why’s behind that turnover rate.
You can also learn how others perceive turnover. For example, if several people have mentioned that turnover seems high to them because people are coming and going so frequently in their department, that’s a problem. Your actual turnover rate may not show this, but your workers are seeing it.
Now, if your exit interviews generally have positive opinions of pay and benefits, your compensation probably isn’t the issue. Scratch that off the list and start digging into other potential factors for high turnover, like company culture or inconsistent management.
3. Compa Ratios
Compa ratios compare salary to the market’s midpoint salary for the same or a similar position. Companies use compa ratios to determine fair compensation for various roles based on market value. Generally, companies aim to pay at or above market values to attract the best talent for positions.
Here’s how compa ratios work:
Say Kevin earns $100,000 a year, and the median salary for his position is $95,000. To find the compa ratio for Kevin’s salary, you divide his salary of $100,000 by the median salary of $95,000, which equals 1.05. Now, multiply that by 100 to find the percentage of 105%.
The market value compa ratio is 100%, so Kevin’s compa ratio of 105% means that his salary is 5% over market value. If your company likes to remain highly competitive with compensation, you might target closer to 110% to 120% for all salaries.
Compa ratios can be beneficial when deciding whether your compensation management processes are hitting the objectives you set. Ideally, HR should review compa ratios annually to ensure that they fall within the company’s target range.
Still, compa ratios only really give information about salary, so you won’t learn anything about your commission structure or benefits from using them. It’s best to combine compa ratios with other compensation management tools and metrics to get a comprehensive view of pay.
4. Job Analysis
A job analysis evaluates current job responsibilities and tasks, comparing them to the expectations of the role. Most organizations should conduct a job analysis of each position within the company once a year to determine whether each role pays fairly based on expectations and the actual work performed.
Here’s what you want to look at:
- What tasks does the person perform each day or most days?
- Does the role require the management or supervision of others?
- What knowledge or skills are necessary for the role?
- What tools are required for the role?
- What kind of environment does the person work in?
- How often does the person have to collaborate with others?
- Has the job duties or responsibilities evolved since it was last reviewed?
If not much has changed since your last review, HR can use current market data for that role to determine fair compensation. However, if more has been added to that person’s plate since the last review, it’s a good indicator that their job description and associated compensation should be updated.
5. Employee Surveys
Don’t wait until someone leaves your company to learn how they feel about working there. Conducting employee surveys can give you helpful insight into your employees’ opinions on everything from workplace culture to their compensation.
Some companies conduct just one survey annually, encompassing all aspects of the company and its work processes, like onboarding, employee engagement, and management. Others might conduct more frequent surveys for specific objectives. If you want to zero in on compensation, you might conduct one annual survey on pay and benefits alone.
In the surveys, gather opinions from employees about their work hours, benefits packages, base salary, commission structure, bonuses, and any other forms of compensation relevant to the company.
Of course, negative sentiments toward compensation aren’t what you want to see, but neutral isn’t necessarily ideal either. The goal should be generally positive opinions showing that workers believe their salaries and benefits are fair for what they do.
6. Internal Compensation Audits
While compa ratios compare your company’s salaries to market salaries for similar positions, internal compensation audits compare pay for similar positions within your company.
Internal compensation audits typically evaluate current salaries and benefits, hours worked, employee credentials and skills, employee tenure, and demographic information, like employee age, race, and ability status. This helps ensure that people doing similar things get paid similarly, with fair adjustments for skills and tenure.
To illustrate, say Tammy and Walter are both tax accountants. Tammy has worked for the company for five years, has a master’s degree, and earns $65,000. Walter was hired one year ago, is currently in school for his master’s degree, and earns $60,000.
An internal compensation audit on these two workers might suggest pay compression for Tammy, as Walter doesn’t have the education or tenure that Tammy does. Having salary ranges or tiers can help HR determine where someone’s salary should fall on the scale to avoid pay compression.
You’ll know you’re passing the pay equity test when HR isn’t noticing major discrepancies between workers of different genders, races, or abilities, and employees with additional skills or credentials have salary boosts to show for it.
All Objectives Complete? Compensation Management Isn’t Over
Compensation management is a continuous process rather than a one-and-done task. Annual compensation analysis is a must to ensure you continue meeting your pay objectives.
How can your company help HR keep up with compensation management?
Make your compensation philosophy clear from the start, use a payroll service, and keep market salary data updated.
