Compensation plays a critical role in organizations’ ongoing and increasingly challenging efforts to attract, retain, and motivate a talented workforce. Compensation design and management play a vital role in aligning employee behavior with business objectives. Human capital costs represent a significant part of most organizations’ cost bases and need to be spent as effectively as possible. It is vital to understand the consequences pay decisions can have on your organization.
Salary structures are an important component of effective compensation programs and help ensure that pay levels for groups of jobs are competitive externally and equitable internally. A well-designed salary structure allows management to reward performance and skills development while controlling overall base salary cost with a salary range cap. Market pricing is the most common method companies use to design base salary structure ranges using external market data combined with a focus on internal pay equity. The goal of market pricing is to keep the organization from 1) underpaying, resulting in losing talent to competitors, or being unable to attract the talent it needs and, 2) over-paying which wastes organizational resources and impedes desirable turnover. The secret to effective market pricing is the ability to spot and adequately analyze and level the data anomalies and imperfections using both science and experience.
Some organizations elect to pay lower than market and offset lower than market wages with offers of ‘good’ benefits, meaningful work, and stability. This practice can lead to employee disengagement and organizations risk losing people. Also, the organization will likely attract people who couldn’t get ‘better’ jobs with higher pay. One of the key determinants of job satisfaction or dissatisfaction is how employees feel their pay package compares to others.
Pay-for-performance programs are used to award employees for desired behaviors and outcomes and they take many forms, including cash bonuses, company stock, and profit sharing. Pay-for-performance plans have a learning curve, and they require regular maintenance in order to be and remain effective. Incentive compensation plans need to align with the company’s business strategy, mission, goals, and objectives. They should address root causes of performance and the goals must reflect a balance of financial results and the key business drivers. Payout opportunities should be both consistent with the performance value and meaningful to employees.
While pay-for-performance plans provide a financial incentive to employees, there can be disadvantages. If not crafted carefully, they can cause employees to focus more on quantity over quality. They may impede teamwork if workers view helping another employee as wasting valuable time that could be spent on reaching their own goals. And just like base pay, incentive pay should be competitive with the market or it could fall short of motivating the employees.
Smart, successful organizations do the regular planning and evaluating of their compensation and performance rewards systems. Compensation is visible and important to employees. It is critical to have a solid and competitive pay strategy where pay decisions and policies match the objectives of the organization. At WageWatch our compensation consultants are focused on your organization’s compensation needs and ready to help you ensure that your compensation programs are supporting your company’s business strategy and objectives. WageWatch also offers accurate, up-to-date benefit surveys, salary surveys and pay practices data that will allow you to stay current with the times. This information is highly beneficial in creating the best salary and benefits packages that meet or rival the industry standards. For more information on our services, including consulting, salary survey data, benefit survey data and market compensation reports, please call WageWatch at 888-330-9243 or contact us online.