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Getting Smart About Compensation

How smart is your company? Smart companies have modern, strategic compensation plans that support
their business objectives and ensure long-term success. After all, compensation is a critical topic for any
company that wants to succeed in a business environment that’s the most competitive in history in terms
of technology, differentiation and talent.

Culture Is the Story of Your Company, and Comp Is Culture

As the HR leader at your organization, you’re an integral player in your company’s success. At a time
when the gap between your competitors and you is smaller than ever, people are realizing that what sets
companies apart is less about what they do and more about who they are.

Today, long-term success is about who you are as a company: your culture, your mission, your vision,
your values, your beliefs, how and whom you hire, and the way you recruit, enable and inspire top talent.
Leading organizations have realized they need to increase their investment and focus on people and culture
in order to succeed.

And when it comes to your people, comp is culture.

Compensation = Culture

Culture is a story. It’s a shared narrative we create together about our company. It’s a story we tell our
employees, and it’s a story that employees tell each other about where they work. Thinking about culture
this way—as a story—can help influence the way we manage and invest in it.

Compensation plays a massive role in that story. It’s the story we tell our employees about how we perceive
their value.

Few things impact a person more than their perception of their own value and their perception of how
others value them. With their employer this is particularly true, given there’s a monetary figure attached
to that value. Because of this, compensation can be considered the keystone of culture.

None of the stories we create about what we value as a company are as important as the story we tell each
employee about how we value them. You can get all the other things about culture right, but if you get
comp wrong, nothing else will matter. That’s why it’s crucial to become strategic about compensation.

And who owns these two organizational priorities? Of course, it’s HR.

With all that in mind, we’ve created a succinct, step-by-step guide to compensation planning and salary
benchmarking. Whether you’re creating a formal compensation plan for the first time or updating an old
one, the following advice and series of checklists will help you through the process.
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Creating and Maintaining a Compensation Plan

Comp is culture, and culture can make or break a company. If you don’t get comp right, nothing else will
matter. By creating a strategic plan to manage compensation within your organization, you can ensure your
culture is strong, and your employees are satisfied.

Ask the Big Questions

The questions you need to ask when you begin to craft a compensation strategy are:

· What is your market?

» This is broader than just your geographic location. What is your industry? How large are your
competitors? Where do your employees come from, and where do they go when they leave?

· What are your goals?

» What are the values you want to communicate to your organization, from executive leadership
on down?

· How competitive do you need to be?

» This is determined largely by combing the answers you asked yourself about your market
and goals.

· What should you reward?

» What types of rewards—financial and otherwise—would your employees appreciate most?

· Is your current strategy working?

» No need to toss the baby out with the bathwater; perhaps parts of your current strategy are
working. If so, try to integrate them into your new strategy.

Once you have answers to these questions, you can begin to create your strategy. (See section “Steps for
Developing a Formal Compensation Plan”)

Get Executive Buy-In

Once you have a formal compensation strategy mapped out, make sure you clearly explain it to your
executives. You’ll get easier buy-in from managers and employees if you do.

Human nature is to oversimplify what we don’t understand. That’s why, among executives, HR often gets
oversimplified. We sometimes take for granted that executives see the same value and complexity in things
like compensation planning as we do, but often they don’t.
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Many executives won’t realize that compensation is something that requires a plan or a strategy, and it may
not be something they’ve included in their business plan before. When you open their eyes to the world of
your discipline, its methodologies, strategy, and importance, they will come to respect and value you. And
it’s important they do, because their buy-in is critical to effective compensation planning; you can’t do it
without their support.

Payroll is by far a company’s biggest expense, so you’d expect it to be subject to the greatest amount
of planning. It often gets almost none.

But the cost of getting payroll wrong is tremendous.

Executives must care about compensation if they care about retention, engagement, satisfaction and
performance. It’s your job to help them connect these dots.

According to SHRM, the cost of replacing an employee is somewhere between 90 percent and 200 percent
of their annual salary; researchers at Columbia University pegged it at 150 percent, depending on the
position. That said, the true cost of losing an employee is more than your organization is likely to realize,
because the costs are often hidden, delayed or difficult to attribute.

A BambooHR study found that pay is the number three reason people leave jobs, and for good reason.
A Forbes report from 2014 noted the average raise an employee can expect is about 3 percent. Given the
cost of inflation, that amounts to only about a 1 percent increase in actual spending power. If an employee
leaves a company, however, they can look forward to a 10 to 20 percent increase in salary. In extreme cases
they can even see a 50 percent gain.

That’s quite an incentive to leave, and a powerful illustration for executives of the need to be scientific,
disciplined, and rigorous about keeping your company’s comp strategy current. Beyond the danger of
attrition, if an employee feels undervalued, the negative ramifications can ripple across the company
with incredibly toxic results.
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Train Your Managers to Talk About Comp

Managers are on the front lines when it comes to communicating compensation with your employees, and
they have far more comp conversations than anyone else in your organization. Despite this, they’re usually
ill equipped to have them.

In fact, according to research, only 19 percent of organizations feel very confident in their managers’ ability
to have tough conversations about pay.

Many managers come to management because they’re great individual contributors, not because they
demonstrated exceptional soft skills. But we can help managers when it comes to having these tough
conversations by teaching them that compensation is about more than just money—it’s about an
exchange of value.
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Understanding the value drivers on both sides of the equation can lead to better comp conversations and
more satisfied employees.

When a manager is having a compensation conversation with an employee, it’s critical that the manager
understand and recognize where the employee feels there’s a misalignment so he or she is able to
address it.

An invaluable resource we can give managers when they’re having conversations with employees about
comp is data, particularly in the form of an Employee Compensation Report. An Employee Compensation
Report provides the data that allows a manager to say, “This is our compensation philosophy, and here’s
where you line up.”

This allows an employee to trust their employer; the mere presence of an Employee Compensation Report
tells employees that their company cares enough about getting compensation right that they’ve done due
diligence on the compensation of each and every employee in the organization.

Communication Roles

HR, executives, managers and employees all play a role when it comes to communication
around compensation.

Compensation communication roles need to be defined:

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It’s important to ensure alignment before any company-wide increase or promotion cycle; get your
managers in a room, talk through the plan, and answer any questions as they come up.

There also needs to be a connection between HR and managers; they need to rely on you. Without HR
as a foundation, your managers will feel that they don’t know where to go for information or that there’s
a lack of information. And that insecurity will trickle down to all employees. Frequent communication
between HR and managers is key.

How to Make Compensation Conversations a Culture Builder

Conversations about comp don’t have to be negative, even when you don’t have budget for monetary
adjustments. Managers and HR employees at every level can learn from the steps below to turn
compensation conversations from awkward interactions to company culture builders.
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Be Open: Listen. Your company’s attitude about compensation conversations will be very clear to your
employees. If they know you’re open to these conversations, they’ll know that you value them and that
you care about them feeling valued.

Conversely, if they know you’re not open to compensation discussions—that they’re taboo or
uncomfortable—they might just leave for another job. Employees would often rather leave than have
an uncomfortable discussion about pay, so make sure your employees know your company values open
conversations about comp.

Take It Seriously: Be sincere. Sometimes the very act of having a serious conversation about
compensation can make the difference between an employee feeling valued or not. Remember, comp is the
communication of how much we value our employees; if they’re feeling undercompensated, they’re feeling
undervalued, and that is deeply emotional.

Don’t Be Offended: Talking about compensation is inherently highly emotional, but make sure to look
beyond the emotion and don’t be offended. If you have an obviously adverse reaction to a compensation
conversation, you can unintentionally intrench your employee in negative emotion. And HR and managers
need to know these conversations can happen at any time; after all, compensation is why we work.
Everyone is thinking about compensation all the time.

Be Positive: When you do get asked about comp, if you don’t make it a positive experience, you could be
telling the story that you don’t care or that you hate talking about it with employees. This could create a
culture where future compensation conversations are stifled, and it’s easier for your employees to simply
leave for a new job instead of asking for a raise. Given the ubiquity of social media in this “sharing age,” your
reaction to a comp conversation will be shared, and it’ll become part of your cultural narrative. So make it
a positive experience, even if you don’t think the outcome will be a good one.

Be Objective: This means diving in and focusing on any misalignment by focusing on actual value and
the employee’s value drivers. This can help remove emotion from the conversation and focus it on a more
constructive outcome.

Be Proactive: Don’t wait for the subject of compensation to be brought up by your employees. Schedule
regular conversations around comp throughout the year. Having designated periods where you talk about
compensation can make employees feel that you care about being competitive and making sure they are
fairly compensated for their value. It can also help employees who think their comp is out of alignment
feel at ease because they know comp review time is coming; simply having it scheduled can help them feel
more comfortable about the discussion.
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So How Do You Do It? Steps for Developing a Formal Compensation Plan

Now that you understand the importance of comp and the need for a strategic compensation plan, we’ve
created a succinct, step-by-step guide to compensation planning and salary benchmarking. Whether you’re
creating a formal compensation plan for the first time or updating an old one, the following series
of checklists will help you through the process.

STEP 1: PLAN AHEAD

1. Complete your job descriptions. Make sure you have written job descriptions for everyone
in your organization.

They don’t need to be 100-percent complete, but they will be essential for matching skills,
responsibilities and experience to each job position.

2. Develop your compensation philosophy. Decide how competitive your organization wants to be, e.g.
lead the market, meet the market or lag the market.

Consider your company’s organizational profile; i.e. are you a small start-up; a medium-sized, growing
company; or a large, established entity?

STEP 2: PERFORM SALARY BENCHMARKING

1. Select sources of salary market data.

Published, traditional surveys: These come from the government, associations or consulting firms and offer
a broad perspective, though they may not be entirely up-to-date or match your organization’s structure,
location or size.

· Internet surveys: Since the advent of Web 2.0, there are now online resources that offer self-reported
salary data from employees. These sources are very up-to-date, easy-to-use and inexpensive options
for comparison.
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· Custom surveys: Several firms are available who can custom design a survey for your business.
Thesetypes of surveys are often very accurate and very expensive. Ideally, you’ll want to have at least
two sources to work from to guarantee the accuracy of your results.

2. Choose positions to benchmark.

When selecting your benchmark jobs, start with those positions that are standard across different
industries, such as HR generalist, accountant and administrative assistant. Next, choose industry-specific
positions that are standard at your company compared to positions in other organizations within your
industry, such as civil engineer, registered nurse and assembly line worker. Avoid using positions that are
a blend of two or more positions. For example, if you have a position which is a receptionist 40 percent
of the day and a project coordinator the other 60 percent, this would not be a job to benchmark.

You will have remaining positions in your company that will not be benchmarked externally. What should
you do with non-benchmark positions? Don’t force matches to market data for non-benchmark positions.
Instead, use your job evaluation tool to slot the position within a pay grade, or use your own internal
assessment of comparable positions within your organization with similar skill, scope, decision making
and responsibility.

3. Age your data.

Choose a multiplier from a source such as World at Work and follow the steps below:

1. Choose the weight you will assign to each source.

2. Use the aged data from that source.
3. Multiply the source data by the weight assigned to that source.
4. Come up with your weighted average.

4. Weigh your data.

If certain sources are likely more accurate, you want to make their data have more influence over the final
salary ranges you come up with. You can weight different sources more or less than other sources on
a position-by-position basis. For example, if you have an industry specific salary source, you may weight
your data more heavily for that survey for positions that are highly influenced by industry.

You can weight your sources with the following steps:

1. Choose the weight you will assign to each source.

2. Use the aged data from that source.
3. Multiply the source data by the weight assigned to that source.
4. Come up with your weighted average.
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STEP 3: ESTABLISH YOUR PAY GRADES AND SALARY RANGES

1. Create pay grades.

It’s important that you choose the right number of pay grades. You’ll want to select a number of grades that
allows you to appropriately distinguish between the different difficulty levels of the jobs. However, you will
not want to have so many that the distinction between the pay grades is too insignificant. Unfortunately,
there is no magic answer, and it is going to depend on how many employees and positions you have within
your organization. More than 25 pay grades may be difficult to administer, and fewer than five will create
very broad bands.

Formal salary ranges help ensure that you have internal pay equity and give you a reference point from
which to negotiate offer letters and changes in compensation with managers and employees.

2. Calculate the midpoint of each salary range.

The market midpoint is the median value of the aged, weighted market data for the position or positions.
It is useful to find because it will help you set your minimum and maximum salaries for a particular
pay range.

To find the market midpoint you average the market data for all the positions within the pay range.
Be mindful of any data points that would be considered “outliers.” This would be a data point that
significantly changes the value of the mean.

EXAMPLE CALCULATION OF SALARY RANGE

Let’s say that your organization is deciding to target the 75th percentile of the compensation market data
because you want to lead the market in order to attract top tier talent. If you are a small startup or
a company experiencing rapid growth, you will need this top talent.

If you are using a straight market compensation strategy, you’ll calculate the midpoint of a salary range
using the 75th percentile from your market data for each position. If you are creating salary grades that
include many different positions, you’ll want to aggregate the 75th percentile from the market data for all
of the compensation benchmark positions that make up the salary grade. These numbers become your
salary range midpoint. The salary range midpoint should be adjusted annually or at some other regular
interval to ensure your organization stays competitive with its pay strategy.

Once you have established the midpoints for the positions, you’ll want to create a range. If you
are adopting a straight market pricing strategy, you may decide to create a salary range from the percentiles
of your market data for each position. As an example, you may use the 75th percentile as your midpoint, the
25th percentile as your minimum salary and your 90th percentile as your maximum salary rate.
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Another approach to using percentiles to develop salary ranges is to build salary range widths from your
midpoint. You’ll create a salary range around your midpoint.

1.Determine salary range widths by position. Like most things in compensation there is no hard and
fast rule here. You’ll want to do what is best based on the goals for compensation within your organization.
Generally, the wider the salary ranges, the more opportunity there is for employees to move up in salary.
You may want a broader salary range width if your organization has employees with a lot of longevity or
you want to encourage employees to stay in their positions for a long time. Broadly, you’ll want to consider
having wider ranges for higher level positions, where the expectation is that employees will have more
longevity (or you want to encourage longevity).

As a general rule, the following salary range spreads can be used:

· Nonexempt positions: 40%

· Exempt positions: 50%
· Executive positions: 60%

4. Calculate the minimum and maximum of each salary range. The final step to creating a salary range
is determining the minimum and maximum for the range. After you calculate the midpoint for the salary
range you’ll be able to complete this final step.

CALCULATE THE MINIMUM

· Divide your range spread percentage in half. Then, take your midpoint and divide it by 1.xx
(xx = half of your range spread).

· For example, if your midpoint is $30,000 and you want your width to be 40%, then you
would divide $30,000 by 1.20. This equals $25,000. $25,000 is your minimum for the range.

CALCULATE THE MAXIMUM

· Take your minimum and multiply it by 1.xx (xx = your range spread).

· For example, if your minimum is $25,000 and your width is 40%, then you would multiply
$25,000 by 1.40. This equals $35,000. $35,000 is the maximum for your salary range.

· For the example above, your full salary range would be $25,000 - $35,000 with a midpoint of $30,000.
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STEP 4: COMPLETE COMPENSATION ANALYTICS

1. Analyze employee pay. Once you have created formal salary ranges, you want to make sure that you
compare your employees’ or incumbents’ pay against the typical salary range. Most importantly, you will
want to determine if you have any employees who fall below the minimum of the salary range (called
green-circling) or over the maximum of the salary range (called red-circling). If you do have this situation,
you’ll want to include an implementation plan for how to deal with the employees that fall outside of your
typical salary range.

2. Choose who to green- or red-circle. It may be necessary and advisable to bring any employee below
the minimum of the salary range up to the range minimum, unless there are justifiable, business reasons
why the person is below the minimum. Second, you may want to consider implementing a red-circle policy
for freezing the salaries of those individuals who are over the top of the typical salary range, until the salary
market catches up with them. Being prepared to deal with these implementation issues will be crucial in
getting buy-in to create formal salary ranges. Without addressing these compensation issues, your business
leaders may feel uncomfortable with moving forward.

STEP 5: BE CONSISTENT AND SCHEDULE REGULAR UPDATES

Once you have established your formal compensation plan and are putting it into practice, consistent
compliance to your documented pay practices and policies, as well as regular updating, is your best
defense against charges of pay inequity from employees and outside agencies. Wherever your company’s
compensation policy is not followed, document the justifications for the decision with relevant information.
And continue to communicate with employees about how the company is working towards pay equity.

By formalizing your compensation strategy, you elevate your company to working to be the best in its
industry in every way. That is a great message to send potential employees and your competitors.

Compensation Plan Checklist

STEP 1: PLAN AHEAD

1. Get buy-in from company leadership.

2. Complete your job descriptions.

3. Develop your compensation philosophy.

STEP 2: PERFORM SALARY BENCHMARKING

1. Select sources of salary market data.

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2. Choose positions to benchmark.

3. Age your data.

4. Weigh your data.

STEP 3: ESTABLISH YOUR PAY GRADES AND SALARY RANGES

1. Create pay grades.

2. Calculate the midpoint of each salary range.

3. Determine salary range widths by position or grade.

4. Calculate the minimum and maximum of each salary range.

STEP 4: COMPLETE COMPENSATION ANALYTICS

1. Analyze employee pay.

2. Choose who to green- or red-circle.

STEP 5: BE CONSISTENT AND SCHEDULE REGULAR UPDATES

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Creator of the world’s largest database of rich salary profiles, PayScale offers modern
compensation software and real-time, data-driven insights for employees and
employers alike. Thousands of organizations, from small businesses to Fortune 500
companies, use PayScale products to power pay decisions for millions of employees.
For more information, visit www.payscale.com.