- Blog post
Creating Cost-Neutral Salary Compensation Programs
Salary Compensation Advantages and Disadvantages
One of the biggest challenges associated with this salary compensation concept is distribution of employees, meaning what a lot of organizations do is they’ll say, “Well, we have a 3% salary compensation budget. So as long as our middle number is 3%, that should work.” Well, that should work if you have a perfectly bell-shaped distribution of performance and a perfectly bell-shaped distribution of a position within the range. We all know that that’s not reality.
So model different “what if” scenarios based on actual data, based on your actual live performance score, and your position in range. That will give you a much more accurate picture of the end result.
The benefit of a merit matrix is that it’s cost neutral.
Again, we’re not talking about adding sand or adding any dollars to the mix. We’re simply better allocating our limited resources.
With salary compensation, you’re both rewarding performance, you’re also accelerating people to market competitive pay levels. You’re accelerating them to the range. And you’re creating targeted turnover.
A lot of organizations implement salary compensation systems and merit matrixes. And 99 times out of 100, the end result is not a reduction in turnover but it is managed turnover. Meaning that if before, an organization had 10% turnover before they implemented the merit matrix, they’ll probably going to have 10% after.
The difference is going to be that before that 10% was oftentimes spread out or maybe even skewed towards top performers. After implementing a matrix, we want to force that to turnover, again, that 10%.
We want to force it to those employees who are already pretty well paid and are poor performing, those employees where we’re getting the least amount of value.
Edited Remarks from “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj