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COMPENSATION & REWARDS
Feb 20, 2013

4 signs your pay program may be in trouble

Lack of ground rules can make programs costly or ineffective
    

By Claudine Kapel

Typically, your car will give you some advance warning that something is amiss before the engine starts to smoke.

While compensation programs don’t come with the same helpful dashboard lights, there are some key indicators you can monitor to identify issues before they morph into serious problems. While your program designs may be essentially sound, they can still get fractured by inconsistent or inappropriate pay decisions that unfold day-to-day.

Here are four signs your pay programs may be in trouble.

1)    New hires are earning significantly more than long-service employees. This isn’t an unusual scenario. The current market rates for specific types of talent may be higher than what your organization is paying so new hires will command more than employees who been on the job for years. Further, long-service employees are generally limited to their annual salary increases to advance their earnings while those who move around more frequently will experience faster gains as they’ll have more opportunities to negotiate new salaries.

This scenario can cause problems because the longer-service employees will likely become disgruntled on discovering that new hires – typically with a lot less experience – are earning more. And they will find out! While there’s no easy fix for such a challenge, sometimes market adjustments over and above annual merit increases are needed to bring internal pay levels into greater alignment.

2)    Managers are earning less than employees who report to them. This can arise for a variety of reasons. Sometimes you can have a new manager who is paid low in his or her salary range, with long-service direct reports who are paid high in their range. Depending on how your salary ranges are designed, there may be acceptable levels of overlap built into the structure.

But sometimes this scenario arises because there’s no mechanism to slow or cap the level of salary increases earned by those who are already paid high in their range or well above market. If you’re not managing to your salary range maximums or have no structure in place, you can find yourself overcompensating certain individuals and creating internal equity issues – much to the chagrin of their immediate manager. Clear guidelines around how to manage pay increases, including when to red circle individuals, are a must.

3)    There’s a significant spread in how much employees in the same job are paid that’s hard to explain. This can arise when there are no clear guidelines for establishing appropriate rates of pay and can fuel employee concerns about pay fairness. Clear guidelines around hiring rates as well as well-defined salary ranges can help mitigate issues.

You may also want to review whether the employees are actually performing the same level of work. You may find there are actually two levels of jobs mapped to one title and if you split them apart you may solve the pay distribution question.

4)    People in the same job with different titles or titles that don’t align with the level of work that’s actually being performed. This is another common source of frustration for employees. Challenges arise when someone is awarded a new title, such as the addition of the word “senior” – perhaps in recognition for long service or in lieu of a pay increase – even though there has been no change to the job itself.

It helps to have clear ground rules for defining titles. For example, individuals in the same job should have the same title and titles that designate level – such as director or vice-president – should be tied to clear expectations around what jobs at those levels entail.

It can be helpful to complete a review of how employees are paid and assigned titles relative to others in the same job or at the same level to test for internal equity issues. And if you’re already hearing rumblings that employees are unhappy about pay, consider that your “check engine” warning.

Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.

    
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