The secret to building a fair compensation plan

One of the most frequent questions I hear from firm owners concerns compensation. Are they paying employees competitively? With the U.S. unemployment rate at its lowest level since 1969, the question takes on particular urgency.

So how do you determine and design a fair compensation plan that satisfies you and your employees? The answer lies in building a strong compensation foundation.

The first component of this foundation is data, which is used for compensation benchmarking. For those who aren’t immediately familiar with compensation benchmarking, this is the process of using your firm’s internal job descriptions to match established industry salary surveys and identify the external market rate for each position. By external market rates, I mean the base rates of pay your competitors are offering for specific jobs performing similar roles and essential functions. Knowing what the competition or comparable organizations are willing to pay is crucial.

I recommend conducting compensation benchmarking at least once every two years to establish market rates for the core positions in your organization. Why? First and foremost, it guides pay decisions around hiring, promotions, internal equity salary adjustments and general compensation budget planning. Because labor is usually the largest cost, a solid understanding of the external value of each position allows you to set overall compensation levels.

Finally, the talent market is constantly changing. Hot jobs today may become less competitive — and even less important — in a few years. Therefore, a compensation foundation must be built on what the market requires.

Compensation benchmarking also provides you information needed to determine costs related to profit sharing or bonuses. There are several industry benchmark studies, that provide important data such as base salary, incentive and total cash compensation.

Still, always remember that compensation benchmarking is more of an art than a science. I have to emphasize this with most of my clients as they think the answers to what they should be paying their employees can be found solely in the data. Unfortunately, it’s not that simple. You must also take into account employee’s performance, experience, specialized skills, credentials, designations, and geographical location to determine the appropriate compensation levels.

The second component to building a strong foundation is to match your job descriptions with compensation data. Once matched, you can get a clear comparison between your staffing expense and the market rate for similar roles. Start with the industry benchmark reports. Always compare job descriptions — never titles alone — when deciding whether a survey job is a good match to your roles. Titles vary widely from firm to firm in terms of scope, size and responsibility, so focus your attention on the actual job functions.

Keep in mind that the information is not real-time data. It could be months — even more than a year — old and may not represent market rates.

The third component: Be timely. With unemployment low, firms will need to adjust pay-raise budgets for 2019, and may need to increase salary. Where you’re doing business matters — some geographical locations such as the San Francisco Bay Area, Chicago, Boston, Los Angeles and New York City are experiencing a very high demand for industry expertise and owners are paying premiums for advisory positions. Plus, these cities have a higher cost of living than the majority of the country: Base salaries need to take that into account.

Key questions

With low unemployment and the expectation of continued economic growth — despite the recent market gyrations — I recommend increasing your diligence when it comes to keeping your comp in sync with the market. Firms need to make sure that pay practices are at the top of their game. This means having a sound compensation structure and tracking developments in the market proactively.

This process begins by asking two key questions:

• Is the firm facing shortages of talent in specific roles, emerging roles for the future growth of the firm, or in specific geographic areas?
  
• Is the firm keeping tabs on pay levels for the jobs it considers most important to its success?
  To meet the demands of current and potential employees in key roles, you may need to rethink your current approaches and programs. This does not automatically mean increasing pay levels. Instead, look for different and creative ways to use money, such as incentive opportunities with more-frequent payouts, changes to performance metrics and, most importantly, more-frequent and productive performance and career discussions. Without such programs, you may not know which individuals are making the greatest impact on your firm’s performance.

A strong compensation foundation must be reactive to changes in the market, but also nimble to take advantage of opportunities to gain new talent. Recruiting workers from struggling competitors, beefing up staff in regions marked for growth and other strategic opportunities may require you to be more flexible than before.