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Oct 6, 2015

Seven tips for effective compensation planning

Having a current compensation philosophy is an important first step

By Claudine Kapel

Ah, ’tis the season. No, not the holiday season — the salary planning season.

Many organizations tackle compensation planning in the fall. It’s when the latest batch of compensation surveys are typically published and many companies set their budgets for their next round of pay increases.

Here are seven considerations to help you make the most informed decisions around pay adjustments and related matters.

Start with your compensation philosophy — or develop one. A compensation philosophy defines how an organization seeks to position itself against competitive market practice and lays out other key principles for compensation management. Do you want to lead, lag or match the market? Knowing how you want to be positioned is essential as it gives you a frame of reference for interpreting market data and assessing to what extent you have internal pay gaps.

Obtain good data sources. Reference relevant compensation surveys to assess how your organization aligns with competitive market practice. Ideally, you should use multiple data sources that cover a good cross-section of jobs in your organization — with consideration to the different functions and levels you have in place. Try to ensure you have data for your most populated jobs, as well as strategically sensitive jobs and jobs that represent hot skills and may be carrying a premium in the market.

Understand market trends regarding budgets for pay increases. Before finalizing your organization’s budget, take a look at what other organizations are doing. Various consulting firms publish research results indicating what organizations are budgeting for pay increases for the coming year, typically expressed as a percentage of payroll, including variances by geography and job category. By monitoring market trends, you’ll be able to see if your organization is keeping pace with competitive market practice. Remember, though, if your organization’s pay levels are falling short, you may need more than the typical budget for pay increases to make up for lost ground.

Don’t forget about salary structure adjustments. The same data sources that report on budgets for pay increases typically also report on market trends with respect to salary structure adjustments. Your salary ranges need to be regularly updated to ensure they keep pace with competitive market practice. If you adjust salaries but not your structure, you’ll end up with employees being artificially high in their range. Over time, this will give you a distorted picture of how competitive your internal pay levels really are relative to market.

Be clear on where you stand regarding pay for performance and develop guidelines, if applicable. Many organizations seek to connect pay and performance. That means top performers should get bigger pay increases than average or low performers at the same point in their salary range. To help support pay decisions, many organizations will develop some sort of merit matrix that defines a value or range of values for pay increases based on an employee’s performance rating and position in range.

Have clear communication guidelines. To ensure your approach to pay-related communication is clear and consistent, be sure to set some ground rules about what information can be shared. Can employees access information about their own salary range? The next pay band up? The entire pay structure? Organizations are becoming more open about what they share regarding their compensation programs and how they operate. It’s important to have clear guidelines and apply them consistently.

Equip managers to have meaningful pay discussions. To support effective — and consistent — communication around compensation, it’s important to provide managers with training and tools to help them share information appropriately with their employees. Managers need to understand how programs operate — such as the criteria used to determine salary increases — as well as the types of information they can share with their people.

Ideally, managers should know how to recognize employee contributions as well as have the difficult conversations where needed. Ideally, managers should play a role in both making pay recommendations and in communicating pay increases to their people. Significant opportunities for performance-related communication and acknowledgement are lost when employees learn about pay increases from their pay stub instead of their manager.

A well-considered approach to compensation planning and delivery can help you make informed budget and pay decisions — which can help you derive the maximum value from your compensation programs.

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