Compensation – Back to Basics

Oddly enough I found myself awake at 6:30 am on Sunday thinking about a number of conversations I have had with people regarding compensation over the last week. It would seem one thing that many people have a tendency to do is forget to consider the overall meaning and process to develop meaningful compensation strategies. They become too focused on the details of the current challenge at hand and forget the bigger picture. So this morning I’d like to lay out a process that takes us back to the basics of developing our compensation strategy.

Analysis

We can’t develop a proper compensation strategy or system if we don’t put some thought into it. We need to understand the mechanisms behind it all and the people it is supposed to serve. Without any foresight into this, how are we to conclude that our strategy and system even have any relevance? So make sure you understand your organization and the staff within it. After all our compensation system is only one piece of the complex systems that must work in conjunction with each other to meet the organization’s goals.

Understanding the organization’s people is important. The managerial style and strategy that the organization adopts is going to have an impact on your compensation strategy. It’s important that managers see the relevance and benefits to your compensation structure. There are a number of factors that should be considered:

  • Organizational strategy
  • Organizational size
  • Organizational culture
  • Organizational environment
  • Organizational technology

One thing to remember is that whenever there is a change within any of these organizational areas it could impact your compensation system thus, derived from this change, would be a need to re-evaluate your compensation strategy again.

One of the key ideas behind creating a compensation system is to form a bond between the desired human behaviours and the reward system. The three categories of desired employee behaviour are notably:

  • Citizenship behaviour
  • Membership behaviour
  • Task behaviour

It’s important to pay attention to what attitudes and behaviours you are trying to encourage and to monitor the results of the system after implementation to make sure no undesirable behaviours are exhibited as well. Sometimes although our intentions are in the right place a component of our compensation system can have outcomes we may not have anticipated. Always better to catch those as soon as possible in order to determine how it might be corrected.

Build Your Plan

In the grand scheme of things how does your organization compare to others? In other words, what mix of compensation elements does your organization have in comparison to other organizations? This is an important thing to consider when developing your plan. Some organizations want to stand out as a leader in the market in order to attract the brightest and best talent. Other organizations may not have the need to do so. So what are the organization’s goals and how do you align your compensation plan to help achieve that? There are three elements of a compensation system you are going to want to consider:

  • Base pay
  • Indirect pay
  • Performance pay

Designing your strategy using the right mix of these elements is how we plan to achieve the desired behaviours from staff and then using this foresight, develop specific compensation objectives. There are a number of challenges an organization should also consider when developing its plan. It’s wise to consider how to manage these challenges and then outline within the strategy how this management will happen. The constraints listed here are certainly some to be considered:

  • Financial resources available
  • Service or product constraints
  • Legal constraints
  • Labour market conditions

These constraints on your plan can have a significant impact on ideas people may have when developing their compensation system. For example, if the company desires to be a leader in how much it pays its staff in comparison to other organizations but simply can’t afford to pay more than some of the others then that plan certainly won’t work unless it is able to free up the financial resources it needs to do so.

What’s It All Worth?

Now depending on the size of the organization, this is where the process can get long, boring, and sometimes downright frustrating for most. Determining a dollar value for every job in the organization is a time consuming exercise but worth every minute and every dollar if done right. There are typically three things to consider when determining the worth of a position to your organization.

  • The value of a job relative to other jobs in the organization
  • The value of a job relative to the same job in other organizations
  • The value of an employee’s performance of a job compared to other employees doing the same job in the organization

Each of these can be determined through assessments designed to view each area in more depth. These are:

  • Job evaluations
  • Market surveys
  • Performance appraisals

These are not areas I am going to go into though at the moment as they are areas that would require much more detailed discussion than what I am writing about today.

Bonus Points!

Earlier I mentioned the notion of including indirect and performance based rewards in your strategy. Most organizations include these in their compensation system for a number of reasons. Indirect pay often referred to by many as “benefits” typically include but are not limited to things such as:

  • Medical insurance
  • Dental insurance
  • Vision care allowance
  • Life insurance
  • Stock options
  • Profit sharing

Sometimes organizations will also include “perquisites” or “perks” for more senior or hard to fill roles which may include such things as:

  • Company car
  • Access to company jet
  • Meal allowances
  • Spending allowance

These are all important areas to consider in your compensation strategy as they can have a direct impact on other areas such as recruitment and retention of staff. If your organization isn’t going to be competitive in how it manages this area then statistically it is best to plan a recruitment strategy designed for higher levels of turnover. Having said that, it is only fair to mention that for some organizations or roles within an organization where it is part of the plan, higher turnover just might be ok.

Performance pay is a concept that is typically used to allow for employees who excel in their roles to have the opportunity to earn more rewards. These plans can be created in any number of ways and can be reflective of individual, team or organizational goals. In some cases some organizations create performance based plans that offer incentives based on a mix of these. The key to performance pay is to consider the goal which it is trying to achieve, make sure it is measurable and be sure it remains a challenge but still achievable.

Do It, Check It, and Tweak It

Once you have developed your system it’s time to put it to work. Make sure to keep an eye on it however so you can catch any unforeseen events before they get out of hand. For instance let’s say you are in a call centre environment and you decide you are going to provide incentive to people who are able to answer a certain amount of calls per day by providing a $2 bonus for any calls answered exceeding 20 calls per day. You may be without realizing it encouraging your staff to disconnect or transfer calls they believe will be too time consuming for them to make the extra money. This would have a negative impact on customer service and certainly would not meet organizational goals. So keep a close eye on your compensation system and tweak it as you run into any issues that arise in accordance with the plan you developed earlier.

Also, there could be any number of circumstances that can change for the organization. This may in turn have cause for reconsideration of the compensation strategy as well. If this should happen then changing your compensation strategy is worth consideration.
Compensation System Design Process

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3 Responses to Compensation – Back to Basics

  1. Pingback: Employee Recognition | Colin Finlay, CHRP

  2. Pingback: Job Descriptions | Colin Finlay, CHRP

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