March 20, 2010

More Compensation Planning Mistakes and the Steps to Avoid Them

By Staff Writer

In a previous post, “Top Compensation Planning Mistakes (And How to Avoid Them),” we discussed the first five of ten most common compensation mistakes and how to avoid them. In this second post, we’ll cover five more habits that can lead you into trouble. We’ve also compiled for each an HR to-do list to avoid these common pitfalls.

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

Finance provides a number for what percentage of the company budget should be spent on HR and compensation. Then HR determines how to create a strategic compensation plan with the allocation of the money. In making this determination must consider a wide variety of factors, such as business health, geographic location, industry, future goals, talent needs and more. Considering all of these factors may seem overwhelming but there are ways to simplify it.

“Budget Focus” To-Do List for Human Resources

Be realistic. There is no “magic number” or single answer to the question of how much compensation should be of total budget.
Do your homework. HR can play a key role by evaluating market rates for positions, compa-ratios for incumbents, and performance reviews, arriving at a recommendation for any planned compensation changes.
Work as a team. Finance and HR have an opportunity to collaborate in support of the organization’s overall financial stability.

6. Over-adjusting individual employees’ compensation.

When it comes time to hand out raises and figure out how to reward people, it’s not uncommon to over reward, year over year, and end of compensating employees outside of their salary range.

“Rewards” To-Do List for Human Resources

Stay up to date. Having accurate data about current labor markets is key. Without information about how much your talent is currently worth, you cannot make credible adjustments to their compensation.
Think long term. If you want the employee to stay with the company and stay engaged over time, take your time with raises. Remember, a raise has only a short-term impact on employee engagement.
Set a plan. Decide how you’ll be rewarding the employee over time and let them know that you’ll be offering increases over time.

7. Fostering a sense of entitlement.

Do you have an annual dinner or outing that your company provides? What about an extra vacation day each year? If your employees have become too accustomed to certain perks, they may not appreciate them as much anymore. How can you make these rewards special again?

“Perks” To-Do List for Human Resources

Know the three year rule. HR expert Sharon Koss talks about the “Three Year Rule,” where in the third year of providing a reward, it loses its power to motivate, engage and retain.
Keep rewards specific. Across-the-board rewards are dangerous because your high performers don’t receive special recognition for their performance, and your low performers benefit despite their poor contributions.

8. Mistaking lack of employee turnover for employee engagement.

How well are you paying your employees? Though you may not be losing employees right now to other companies thanks to the current economic conditions, there’s no guarantee that they are satisfied with their compensation.

“Market Rate” To-Do List for Human Resources

Study the market. Though you don’t have to do anything about it (yet), you should know where your organization is paying below-market compensation so that you can be ready to address retention risks.
Consider the whole group. Disengagement is dangerous to your organization. Individuals who are retired on the job drag productivity and morale.

9. Improperly compensating your new hires.

When you hire a new employee, what you pay them can set the tone for long-term satisfaction or disappointment with their compensation. If your organization notably under- or over-pays your new hires, you run the risk of losing good talent or creating employees who expect more than they have earned.

“New Hire” To-Do List for Human Resources

Be realistic. People know what they are worth. Even if they accept a position at below-market wages, they may bear resentment toward the organization (and ultimately leave).
Manage your managers. Rogue hiring managers do not always serve the organization’s best interests. Whether they want to pay too little or too much, they waste financial and talent resources. Make sure they are aware of what they can offer and why.

10. Making internal moves without first evaluating market compensation rates.

Beware if your organization moves employees into different roles without evaluating how much the role should pay. It’s common to focus on what the employee currently earns.

“Internal Moves” To-Do List for Human Resources

Check the market first. Any internal moves are occasions to consult current market pay ranges.
Think before you move. There may be good reason for moving expensive talent into jobs with lower compensation – but don’t do it by accident. Be deliberate about your talent placement and compensation choices.

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