Top Compensation Planning Mistakes (And How to Avoid Them)

By Staff Writer

There are many ways to make mistakes when doing compensation planning. The day-to-day hustle of growing a business can cause anyone to miss key details, fail to communicate fully or skip some step in the process.

In this post on compensation planning mistakes, we’ll help you learn what’s most important about your communications with employees, ways to boost employee morale and how to create a more efficient work stream when it comes to planning compensation budgets. Below are the first five of 10 suggestions we’ll be sharing with you. Feel free to leave a comment with some suggestions of your own.

1. Failure to communicate your organization’s compensation strategy – and the reasons behind it.

Who talks to employees most often about their compensation? Likely, their manager. Many organizations rely on managers to convey messages about compensation. But, this can result in inconsistent messages being given. Each manager is a unique person with their own perspective on the way payment is earned and given at your company.

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How can you help your managers communicate employee compensation plans more clearly? Try these tips:

• Take it to the top. Your employees need to hear from the senior leadership team about how the organization makes compensation planning decisions.
• Be consistent. Consistency of messaging is key. Your senior leaders and your managers need to convey the same information.

Also, see our post on how to explain employee’s total compensation.

2. Wild lurches in compensation planning and strategy from year to year.

You want to stay up to date with the latest compensation strategies and keep employee morale high, but beware of changing strategies too often. If one year your organization is focused on pay for performance, then the next year there is a salary freeze and the following year the philosophy changes again, your employees will feel uncertain and may seek work elsewhere.

How can you fix this tendency to jump around?

• Stick to your plan. Only make changes that you feel are essential to the company’s goals. Employees may respond badly to flavor-of-the-month-style management techniques.
• Minimize resistance. If you do change any aspect of your compensation plan, employees will quickly calculate the perceived loss to them from a change in philosophy. They are less likely to see the possible benefits. You’ll need to spell the benefits out clearly.
• Have resources ready. Your compensation strategy requires resources to support it. There is a danger in announcing a compensation approach if there isn’t the money, time, or focus to execute the strategy effectively.

3. Inconsistency in messaging about your compensation strategy and the practice of it.

Does what the organizations say about its compensation strategy differ from what the organization actually does? This will be hard on your employees and on you, as you’ll be listening to their complaints and answering their questions instead of getting other work done.

How can you avoid this trouble?

• Avoid secrets. Assume there are no secrets in compensation. Manage as if the information will leak.
• Reduce exceptions. If you are considering making exceptions to the stated rules – granting raises when the organization is under a salary freeze, awarding bonuses on a one-off basis, treating executives one way and employees another – think twice.

4.  Failure to equip managers to have effective conversations about compensation.

Explaining compensation is a big responsibility. Managers do not communicate compensation strategy and individual compensation decisions credibly. At best, they put employee morale at risk. At worst, they put the organization in legal jeopardy.

Here are tips for improving communication from managers:

• Train your managers. Many organizations invest in management training for hiring, anti-harassment and performance appraisals, but neglect to train managers on how to talk about compensation.
• Check their answers. Your managers will be asked difficult questions. Can they answer these questions to your and the organization’s standards?

• How does the organization set salaries?
• Why did I only get this much money?
• Why did my colleague get that much money?
• What can I do to maximize my earning potential at this organization?
• When can I expect to see my hard work turn into better compensation?

5.  No answer to the question: "How much should we spend on compensation?"

Finance provides a number for how much the organization can spend on compensation. HR determines how to allocate the money when planning compensation. Unfortunately, there is no “magic number,” no single or easy answer to the question of how much it’s smart to actually spend and where to spend it. The organization’s circumstances – business health, geographic location, etc. – are critical to consider in this calculation. And, the process of figuring out all of this information takes time.

Want to spend your compensation budget smarter?

• Do your research. HR can play a key role by evaluating market rates for positions, compa-ratios for incumbents and performing employee performance reviews to arrive at a recommendation for planned compensation changes.
• Work together. Finance and HR have an opportunity to collaborate in support of the organization’s overall financial stability.

Related Articles:

• How to Explain Employees' Total Compensation
• Strategies for Difficult Employee Communications  
• Developing a Competitive Compensation Strategy

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.