Is Compensation at Your Company a Shot in the Dark?

Chris Schave, PayScale Account Executive

Throughout my time at PayScale I have had discussions around compensation with hundreds and possibly even thousands of HR Professionals, Managers, and Executives. At this point, I’m not really surprised by a whole lot. Some companies have no compensation plan, structure, or strategy, while others have one, but it’s based on shifty compensation practices. There are actually some who are highly sophisticated and know exactly what they are doing and why they are doing it, but that’s not as common as the other two scenarios.

A Shot in the Dark
I am often times confused about the decisions people make around one of their largest expenses in their organization, compensation. Lately, I have talked with a few people who have told me that they set pay based off of what the market is paying. I’ll ask, “Great! How do you do that?”  They tell me they will ask interviewees what they expect to be compensated and what they have made in the past. “Wait, what?!” This is where there is a disconnection between solid compensation practices, and what I consider to be shots in the dark.

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Inherently, basing your payroll budget on the candidate answers is a flawed system. Think about this… you are asking someone that is either unemployed, or seeking a new job, in many cases for higher pay, what they have been paid or would like to be paid. If this is your practice then I encourage you to ponder a few points:

1. These candidates are coming from other companies. Are those companies larger/smaller, in a different industry or a different location? These factors will definitely impact pay.
2. Were the skills, experience, or certifications required at their previous job the same as you require?
3. Were they let go because they were overpaid, or maybe they were a low performer and not compensated the same as the superstars at the previous company?
4. When was the last time the salaries were reviewed at their previous/current company and how did that company find the data to set the pay?

Whether it is a 20 or 20,000 person company, I don’t see how basing compensation on candidates’ input makes sense. Granted, it is a small step above not having any structure around pay, but not by much. Trust me, you might think you know the market if you do this, but it is probably a very broad spectrum that really won’t help you be strategic around compensation.

On Top of the Game
There are companies that are on top of their game. They have a structure, a plan, and a strategy about where they want to target their compensation based off of the market competitiveness of each job in the organization. They update this plan with the most current data at minimum once a year, and they have control over their largest expenditure as a company. More importantly, they use it to drive their business forward.

If you’re not strategically setting pay, your company could be misallocating many thousands of dollars – without even knowing it – which is the worst kind of problem. As an HR professional it is your responsibility to step up to the plate and lead your management through compensation planning that follows best practices to attract and retain the right people.

If you’d like to learn more about best practices around compensation, we’d love to show you how PayScale is not only conforming to best practices, but helping companies learn how to access and use better compensation data. Let us know if you want to see how well your positions are being paid relative to the markets you care about.