Four Steps to a Better Employee Compensation Method

by on June 11, 2009 · 0 Comment POSTED IN: HR Info Center

Have an employee compensation plan that makes sense

To have a meaningful conversation about employee compensation, you have to have a meaningful strategy to talk about. Ultimately, you need to have an employee compensation plan to talk about that has integrity. And in order to have integrity, you’ve got to do something that makes sense. You got to have a system that makes sense. There is a four-step process to build a salary system that stands up to scrutiny and to straight conversations. Don’t try to be sexy with your employee compensation. Be boring. Creativity and innovation often lead to confusion and sub-optimization. There are all sorts of ways to screw yourself up. You can shoot yourself in the foot really easy by getting creative with employee compensation.

  1. You want start by benchmarking your jobs and creating a salary structure. Describe your jobs in terms that reflect the world outside. So yes, everybody you’ve got working for you does very specific things but describe your positions in ways that sound like the jobs that are out there. So, if you’ve got an accountant, talk about them in terms that make sense that are benchmarkable to accountants outside. If you’ve got an industrial hygiene person, look at them in terms of what they would look like on the outside.
  2. Now, once you got that data and you built your salary system, you want to adopt a common date. Doing employee compensation all year long spreads your energy out so much. Look at everybody at once and be able to make sure that when you pass out all the money, you stuck to your 3% budget, your 4% budget, and your 3.5% budget, what ever it is. Prorate salaries for those that switched months. So if you had somebody and they’ve only been with you four months and you ought to prorate it so they get only four out of 12 months worth of adjustment.

    When it doubt, err in the employee’s favor, if you’re moving everybody to a common date, then you definitely want to prorate because if somebody loses money because you’re getting more efficient with your employee compensation plan, they’re not going to like you. So, I would always err and make sure they know you’re erring on the side of doing something so they’re going to come out of this is good or better than if you’re doing it the old way.
  3. Allocate your employee compensation budget based on compensation ratio. Devise an allocation scheme that spreads your budget reasonably without attempting to factor in performance. Their compensation ratio is more important to their salary administration than last year’s performance. Devise the system that says based on your compensation ratio, my first cut; this is what you ought to get. Put all this information into a computer and it should generate the numbers you’re looking for. Tweak this system so that you’re under your desired budget. So, if you plug in some numbers and come up with a salary system that exceeds your budget, you got to take it down. If that doesn’t spend all your budget, you move it up. You’re allocating that budget based purely on what the computer says somebody ought to get based on where you find them.
  4. Now, that manager breaks this data up to his or her managers who then look at their direct reports and say, “I would like to adjust this individual up or this individual down because of the following factors.” We want one to two sentences to justify why you’re moving them up or why you’re doing them down and these are typically performance related. Eighty percent get the computer-generated recommendations anyway. But about 20% of them, you say, wow, she exceeded all of her business calls and she’s worked nights and weekends and by the way I want to promote her next year. So, the computer said she’s should get 1.5% I want to give her four. And this gentleman here. The computer says he’s entitled to five because he’s in the first quartile but I told him he’s failing in his assignment and I want him to get zero. Fine. HR ought to look at these and make sure that there’s no inequities. And bottom line, you got to make sure these numbers add up and don’t exceed whatever your employee compensation budget is.

Edited Remarks from “How to Drain the Drama from Salary Reviews: A Conversation Roadmap” by Gary Markle

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