July 28, 2010

Decided, Defined, Done: Why You Need a Business and Compensation Strategy Right Now

I have written lately about the importance of integrating general business strategy with compensation. The fact is that your business strategy is likely more clearly defined right now than your compensation strategy. You might not even have a compensation strategy at all. Do you know where you want to be in the market as an employer, compared to your competition? Are you hiring in a range that you can afford long-term?

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I help customers with questions like these every day. PayScale is, obviously, in the business of selling tools that allow companies to set salary benchmarks for their organization and get market-based compensation data. And, here’s the part of that process that is challenging for many organizations. One of the first things you need to do when you’re deciding to benchmark your organization is to decide what your compensation strategy is.

We work with a lot of organizations that have never done formal compensation planning. So, they don’t really know where they are at. In that case, we may recommend that they benchmark their organization first using their best idea of where they want to be relative to the market and who their competitive set is. Then they can make decisions after they’ve seen the data and understand how they compare to other employers.

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But, once that work is done, I push them to set up a formal compensation strategy. It is critical. I joke with people, and share this only in certain circles, but with all of us being HR professionals, I can tell you (and I hope you can agree) that I can make compensation numbers say anything I want them to say. The more polite way to say this is that compensation work is an art and a science. The scientific element of it is acquiring, using and analyzing the numbers. But, there is additional input into those numbers. You have to ask, “Where do we want to be in the market and who are we competing against?” The answers to those questions can vary the pay quite a bit.

This “artwork” is why you have to be smart about your compensation strategy. Your considerations can include everything from industry to geography to organizational size. You can learn more about compensation planning by reading our blog post, “Employee Compensation Plan Design.” It explains how to make strategic decisions by industry, geography and organizational size.

Diverse Strategic Needs within Your Organization

Here’s the key point, though. You may not have the same definition across your organization for all of those factors. Different locations of your company’s operations may require different strategies. It reminds me of a story about a customer of ours.

This story is about a CFO. He comes to his HR person and he says to her, “We need to do a benchmark. We’re having too many troubles with pay decisions. It’s getting out of hand. Managers are making decisions willy-nilly and I need some structure around this.” She replied, “No problem.” She did her due diligence, she found her sources, she found a plan and she got everything organized. She was working with PayScale as one of her sources and as the repository of all her data. And, we worked hard to get everything just right.

The CFO warned her, “This study needs to be specific to us. The data needs to be specific to our city, our industry and it needs to be specific to our size of our organization.” She said, “No problem” and she followed his instructions. Guess what happened? Everybody showed up as overpaid.

She took the data to her CFO and he said, “Are you kidding me? This is not right. This data is wrong.” She called me at PayScale and said, “Oh no, what do I do?” We had a conversation and she went back and talked to the CFO. I gave her some questions to ask. And, so, through this conversation with her CFO he said, “Listen, there is no way that I can get the applicants we need with these salaries.” She responded, “Where are those people coming from?” He replied with the name of a company. Keep in mind, that this HR professional’s company has about 150 employees. He named a company that has 136,000 employees worldwide and is based in the northeast, whereas this particular company was based in the south.

What we ended up doing was this. The HR professional had talked to the CFO about the information in theory. But, CFOs are numbers people. I heard a funny quote yesterday from a friend’s CFO, which was, “Listen, I know you keep trying to talk to me in Word but I want to see it in Excel.”

We took all of her positions and we re-priced them to a different competitive set, which is really easy to do in the tool. That competitive set was modeled after this other organization that he had named. And, then, we lined the numbers up side-by-side. And, sure enough, there were dramatic differences in the pay. The HR person said, “This is what you asked for. This is where you say that we compete for talent but look at the differences.”

This example is meant to emphasize how important it is to know what your organization needs and who your organization is competing with so you can make good, smart decisions. For more help, we also have a webinar called, “Developing Your Compensation Policy and Philosophy” that goes of the nuts and bolts of that process.

Regards,

Stacey Carroll
Director of Customer Service and Education
PayScale.com

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