February 16, 2010

Think Ahead: Smart Employee Compensation Plan Design

When it comes to helping HR professionals utilize our tool to build, maintain, or update their compensation program, I hear myself saying over and over again, “remember it’s a tool, but you have to know what you want from the tool before it can be useful.” It is very important for any organization that is going through the process of benchmarking to work through what their employee compensation plan design strategy is prior to trying to interpret external market data. Part of defining your compensation philosophy is knowing who you compete with for talent and how competitive you want to be. Let me provide you some examples of what I mean.

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1. Who do you compete with for talent?

Before you can ask yourself “How do I design a compensation plan?” you will need to understand the market you are competing in. In nearly every survey you utilize, you’ll be asked to define your organization or choose a “cut” of the compensation data based on your size, geography or industry (to name a few of the scoping factors that are used). Many people take this step for granted and enter in the details about their organization exactly as they can be described today. But, if you do this you may be missing out on an important fact. You may compete for talent from different types of organization than who you are.

Here are some common examples that our customers need to think about when benchmarking their positions against the market.

You compete for talent with a different organization type than your own.

The most prominent example that I can think of here is a non-profit company who may be hiring for an accountant role. Many people understand and argue that salaries will be lower if you work for a nonprofit organization as opposed to a for-profit company. In many nonprofit specific roles (i.e. program manager, executive director, development director, program coordinator) people go into and stay in these roles knowing that the salaries will be less, but what about an individual that did not choose a nonprofit-specific career? Having someone with good accounting knowledge is just as critical in a in a nonprofit organization as it is in a for-profit company. Therefore, the challenge may be to benchmark this role (and others in the organization with this same set of circumstances) against a different competitive set.

You compete for talent with a different size company than you are.

In most cases (although not all), the size of the organization has a correlation with pay. Generally speaking, the larger the organization the higher the pay is because the organization has more capital to invest in wages. So, if you are a small company but you compete for talent with larger organizations, you may need to be mindful of this when you are benchmarking. Let’s say you work for a small internet company in an area where there are lots of software companies. When it came to pricing your developers, you may need to adjust the size of the organization to get an accurate benchmark price for developer talent in your area.

You compete for talent nationally rather than locally.

Most organizations have a subset of their positions that they recruit nationally. This is often the case with executive positions, but it may also be the case for very niche positions that are specific to your industry. When you are recruiting nationally, and the employees that would be attracted to this role routinely move across the country for a new opportunity, the geographic influence of pay may be less pronounced. Therefore, you may want to consider pricing these jobs nationally. Additionally, you may need to price these jobs nationally to get a large enough sample size. If you operate in an area that has high cost of living, i.e. San Francisco, New York or London, you may need to adjust the national numbers to account for a high cost of living.

2. How competitive do you want to be relative to the market?

In addition to defining your competitive set, you will also need to decide how competitive you want to be relative to the market. Your organization’s competitive positioning will depend on many variables which may include:

the outlook for growth over the next year and beyond
your company’s ability to attract and retain talent
your industry
your overall philosophy on pay

Many companies choose to target the market somewhere between the 40th and 90th percentiles.

In addition to choosing your target for the market (the percentile), you may also want to consider choosing a different target based on positions and/or departments within your company. Your ability to attract and retain talent within certain areas may be more critical to the organization’s success in the future.

As an example, a very common approach for a high-growth tech company would be target the 60th-90th percentile, depending on the position. They may target the 40th percentile for support and administrative positions, the 60th percentile for developers and marketing professionals and the 90th percentile for sales positions.

Defining your competitive set and your competitive positioning in the market place is an important first step in benchmarking your organization. It takes careful thought, and buy-in from all stakeholders.

Before you attempt to benchmark your organization it’s important to get decision makers in agreement about where you want to be relative to the market and who your market is. This information should weigh heavily into your employee compensation plan design. Taking the extra time at this step will help ensure that you can take full advantage of the benchmarking tools that you have invested in. Remember, employee compensation plan design is a blend of science and art. The artful part is understanding your organization, your goals for compensation and utilizing the information you have to create a perfect marriage between strategy and execution.

My best to you in these endeavors,

Stacey Carroll
Director of Customer Service and Education
PayScale, Inc.

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