March 13, 2010

Q&A Session – Refining Your Compensation Budgets

The following is a transcript of questions and answers from PayScale’s webinar, "How to Play a Key Role in Compensation Budgeting." The topics covered include how to make shrinking budgets go farthest towards improving employee performance, ways to encourage performance other than higher wages and how to ensure senior management support. Answers are provided by PayScale’s director of customer service and education, Stacey Carroll, M.B.A., SPHR, Frank A. Cania, SPHR, and Betty Richardson, CCP.

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Q: Why would we want to spend more money on compensation budgets than the market requires if financial times are tough and employees aren’t really moving around?

A: What you want to do is make sure that you are positioning yourself for the future. So, if you are able to afford it and if your company intends to invest in full employment and continued growth, then if you are behind the market place when the market turns around it will be difficult to catch up. Your best performers who are paid less than the market will jump ship to find a better paid job and they are going to do so quicker than those that are earning equal or greater than the market in these times.

Q: Are you recommending paying more to an employee in a protected class, even if the employee performance does not merit it?

A: Absolutely not. What you want to ensure is that employees in protected classes are being paid fairly against those who are not in protected classes. Certainly, if someone needs improvement, you are not going to pay them the same amount as someone who is exceeding the requirements of the position. What you want to ensure is that you are paying people in the same range similarly, protected class or not. Be aware of who is below expectations, at expectations, and who is excelling, given whatever other factors are involved, such as seniority or other issues. You want to be able to make a sensible, justifiable case for why individuals are being paid what they are.

A: Using the merit increase matrix, all of your supervisors will be using the same tool to make their decisions, so it should result in more fairness across the board. This tool is very helpful as well for exceptions where a manager will need to argue for paying an employee more than usual. Usually, at this point, the HR department will need to get involved and it typically acquires special approval and signatures to go outside of the matrix payment framework.

Q: Why should pay increases be based on actual dollar amounts instead of percentages?

A: The actual pay is the ultimate logic check. The bottom line is, “Am I paying individuals fairly?” The merit increase matrix is a tool to help you make this determination, but eventually you need to look at actual pay.

Q: What do you do if the matrix or guideline does not get the employee to where the manager wants them to be?

A: This question comes up all the time. There are a couple ways to address this. First, there are no unlimited compensation budgets, especially in this day and age, so the manager should have an understanding of the overall compensation budget. Therefore, this matrix should be a useful tool for helping employees reach their desired compensation in a fair and equitable manner.

If you find that an individual has been mistakenly paid less than fairly in the past, especially if that individual is part of a protected class in the workforce, then there is good reason to make a one-time exception to bring that employee up to par. However, normally, you will move the employee towards the correct pay rate over time, which can be quite a lengthy process. An alternate method is to ensure that the manager is willing to conform to the entire compensation budget. In other words, if one of their employees will be paid extra, the manager needs to be able to make up that difference among their other employees. As long as this is based on an employee’s performance and position within the range, this is the right course of action.

Q: Some HR professionals criticize the merit increase matrix, saying that it leads to gaming of the system by managers. In other words, a manager might rate someone differently, in order to get them the type of increase they want them to have.

A: A manager can game or distort any management plan. The bottom line is that we need to ensure that we are giving our managers the skills and tools to make good decisions and set up checks and balances for the organization within the process. For example, if you have a manager who is attempting to distort your process, the first thing you will do is look at the distribution of their performance ratings. If you have a manager who has 90% of their employees in the top performance category, that’s something you will have to examine very closely, unless that department has really exceeded every performance category. Most important is to build checks and balances into your compensation system to ensure that nothing gets far out of balance, and the best possible decisions get made.

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