4 step process to build an effective compensation system

Stable logical employee compensation systems allow for adult conversations

Now, when you talk to employees – the reason we’re talking about employee compensation systems and strategy here, the reason we’re talking about philosophy is if you’ve got — in order to talk to somebody like an adult, you better have something stable to talk to them about.

Part of our problem, when talking to people, is that we don’t want to talk about our employee compensation system because it doesn’t actually make sense. It’s too arbitrary. It’s all made up. It’s all hodge-podge. It’s all patched together.

This is the four step process to build an employee compensation system that stands up to scrutiny because even though you’re not going to open the books entirely and that we wouldn’t recommend that you tell everybody everything about what’s going on here. I would recommend that you could at least talk to people about the way things work and you’ve got to have a solid foundation. This will get you there.

Establish salary ranges for all jobs and calibrate each range to the market.
And how do you do that? You want to first describe all your jobs. You start with a job description and you basically – you do it in a way, you take that job description, but you got to make it match to the market somehow. As you get larger, you tend to have more clearly defined jobs that resemble market jobs. So, you need to describe your jobs in terms to reflect the market outside and there’s ways of blending jobs to kind of get a creative match when somebody’s both an office manager and kind of your assistant or whatever.

Define what salary minimums are, maximums are, mid points for each job in your employee compensation systems
Then you bunch your jobs into groups who share similar salary ranges. I would say, normally, five to 15 salary levels. And if you’re a small company, you may skip several levels. There may be nobody on three or four of the levels that you have out of eight or 12, because you just don’t have any employees in those categories, you skip them in a smaller organization sometimes.

Recalibrate as needed
And you realize in this whole process that some of the salary ranges can overlap. And every three years, after you get this figured out, you got to recalibrate every three years. And in the interim years, you kind of age it according to what you read about as inflation.

Adopt a common date for salary changes
This is a strong recommendation I would have. If you were out there doing anniversary dates for salary administration, I would tell you, there are a couple of great reasons to adopt a common date.

Strategic recommendations for an effective employee compensation system
Be boring. Go for the middle of the road. I think creativity and innovation often lead to confusion and sub-optimization.

Study the work of W. Edwards Deming. Learn what he tells you about incentives and try to differentiate individuality versus – he calls it, optimization and sub-optimization, he says, you know, we need to optimize the whole. Bottom line, what he will tell you is, you want to be kind of straightforward with the way you pay people and don’t get too cute with it.

Differentiate. Your culture, your working conditions, the general way you treat people and that’s great, that’s your competitive advantage. Again, most people can’t afford to get too creative with salaries.