August 14, 2010

Help Your Company Stay Afloat: Customize Your Compensation Plan

In an era of small budgets and stiff competition how can you, the HR professional, help make sure that your company is thriving, ten and twenty years from now? You need to get very specific and very strategic about your compensation decisions. You can’t just take a cookie cutter approach to your compensation strategy. If you want to beat your competition in business, you need to be different than your competition in your compensation plan. And the best way to do that is to customize your compensation plan to fit your organization.

How do you communicate your compensation plan to your employees? Learn how to simplify your approach in four easy steps by downloading PayScale's whitepaper: "4 Tips for Communicating Your Compensation Plan to Your Employees"

HR professionals work for companies of different sizes in different industries with different priorities and in different economic and market situations. How do you drill down to what your company needs? The following are three of the six tips from HR expert Stacey Carroll in our two part series on how to customize your compensation plan. See the next post "How Do I Design a Compensation Plan?"

1. Revisit your salary benchmarking strategy.

If you have been doing salary benchmarking at your company for years and you have been doing it the same way, it’s likely time to start thinking about how you can approach benchmarking a bit differently. For example, your company’s business model has probably changed over the years and it may be wise to look at how your employees’ compensation compares in some industries beside the one that you’re in. Perhaps certain positions at your company are more competitive in another industry and that is why you are having trouble hiring for that position. Salary information from other industries could help you sort out who you should be paid more or less, in accordance with your compensation strategy.

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2. Revisit the design of your employee pay ranges relative to business goals.

Not all jobs are equal, therefore pay targets should not be either. Ditch the 50 percent, across-the-board mentality. It’s time to think more strategically than that.

There are software programs available to help you strategize. For example, PayScale’s compensation tool, Insight, offers a feature called “Compensation Strategy Manager.” Compensation strategy manager helps you target the market percentile differently for different positions. You can organize the jobs at a certain percentile by functional area or job code or position level. Whatever the quality of the job is that makes its percentile different, you can set a default percentile.

For example, let’s say that across my organization I want to target the 60th percentile. But, then I realize that for my sales team I need to be more competitive than that. My company is a small one and sales are “do or die.” I decide that we need to pay the sales team at the top of the market because we need the very best people to drive profitability.

I decide to target the 75th percentile. In PayScale’s tool, I can save that strategy and then, when I’m analyzing market compensation data, I have a column that includes annual base at target for that percentile for my sales team. So, instead of just doing a traditional 50th percentile target, I’m actually varying my strategy. And, I’m doing it in a way that aligns with business priorities.

So, whether you have a handy tool like “Compensation Strategy Manager” or you’re doing the work on your own, as you’re interpreting your market data, don’t adopt an across-the-board strategy. This is a great way to be different than your competition in your compensation plan. Just make sure that your strategy aligns with the priorities of your business.

3. Find out where you are relative to the market.

How up-to-date are you with where you stand in the market? Find out where you are in the market and make sure that you have some numbers to back up your findings. Your CFO will want to see the numbers, not just hear about a philosophy. To gather these numbers, there are two things that you are going to do.

First, establish where your numbers are going to come from. This step has to do with taking a look at where you’re targeting the market. One the one hand, you can decide to target the 50th percentile across the board. That will give you certain numbers.

There is a next step after deciding that you are going to target the 50th percentile as the midpoint of your range. You need to consider that not every employee will be at the midpoint of their range, yet. So, the other thing to do is to create a target comp ratio for their base salary. This approach varies by organization but you could choose to rank the numbers by longevity along with learning in the position. Or, it could be that you have five performance ratings instead of three. This effort will result in a salary budgeting matrix. (See our previous post on the employee performance matrix.)

PayScale’s newest release of Insight has a budgeting tool, as well. It looks at employee pay compared to internal ranges. You can look at pay distribution, compa ratios, range penetration and the portion of base pay below the minimum and above the maximum. This is a great way to bring some numbers to your executive team because you know they’ll ask, “How much is this going to cost us?”

Regards,

Stacey Carroll
Director of Customer Service and Education
PayScale.com

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