How Do I Know if I’m Compensating My Employees Fairly?

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Are you concerned about fair employee compensation?

Before understanding fair employee compensation, let’s first define compensation.  A person’s compensation includes both the financial and non-financial rewards of their position. 

Financial rewards come in two forms:

  • Direct pay consisting of a person’s wages or salaries, bonuses and commissions.

  • Indirect pay including benefits, leaves, retirement plan contributions, education reimbursement or other services such as child care.

Non-financial rewards include things such as career development and advancement opportunities, flexibility work schedules, opportunities for recognition, opportunities to work with leading edge technology as well as intangible factors.

Direct and indirect pay and non-financial rewards comprise the total rewards of a position.  Using a total rewards approach in designing a compensation system is important because monetary compensation is not always the only factor (or for some the most important factor) taken into consideration when determining fair employee compensation.

Developing a compensation system begins with clearly identifying what the system should accomplish and why.

There should be clear understanding of how the system will support the organization’s strategy and operating plans.  Clarity around the purpose of the system as well as the thinking and values the system should reflect is articulated through the organization’s compensation philosophy.

Your compensation philosophy will give voice to what is important to your organization’s leadership; what factors should drive a person’s pay; and the type of culture that is wanted.  Transparency builds trust, supports attraction and retention strategies and leads to the organization’s compensation guidelines being consistently administered.

Salary bands for specific job categories are best determined by reviewing compensation surveys data from reliable sources.  The data helps determine the competitiveness of a company’s pay practices and set guidelines for new hire compensation.  Your pay structures should reflect your philosophy and appropriately tie compensation to individual or team goals.

Pays ranges set the minimum, midpoint and maximum bands for base compensation as determined by the survey data averages for each position. Employees who are paid below the midpoint may lack experience or be new to the job. Employees above the midpoint are typically high performers; individuals who possess knowledge and skills that add unique value; and/or individuals who have been with the company longer than their peers.

There is not one right way to determine where a person fits into the salary band.

When evaluating jobs on the basis of their external market value you can match a person to the open market based on comparable duties, education, required skills, experience, size of company and so forth. The typical (average) person who has achieved the expected level of competency for the salary survey position would generally be paid at the 50% percentile plus or minus their relative worth to the organization.

Factors that determine relative worth can include the person’s performance history, unique skills, future potential and upside, level of responsibility, working conditions or other job related considerations that you feel are particularly relevant. When pay ranges are based on market rates, we can use comparative ratios to determine how much a person’s salary is lagging, matching or above the market. Comparative ratios are calculated by simply taking the person’s pay rate and dividing it by the midpoint of the salary band. A Compa-Ratio of 1.00 or 100% means that the employee is paid exactly what the industry average pays and is at the midpoint for the salary range. A person with a Compa-ratio below 1.00 may indicate the person is being underpaid and a potential risk for leaving the company if they believe their relative worth is higher.

We recommend adjusting the salary bands for inflation every 12 months and purchasing new salary surveys every three years.

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