Navigating compensation design decisions
Market trends helpful, but shouldn’t eclipse organizational objectives
Jan 29, 2013
By Claudine Kapel
When it comes to compensation and rewards, what are other companies doing?
That’s a question those involved in designing and managing total rewards programs frequently face.
In principle, it’s a fair question. It’s good to understand market trends and the prevalence of different types of programs and design features.
But the insights gained from such research need to be considered within the context of an organization’s own objectives and priorities. It’s also helpful to keep in mind that general trends don’t always tell the full story of what is happening in organizations.
Take for example, the arena of competitive market positioning. This represents how an organization seeks to position its internal pay levels relative to competitive market practice.
A recent WorldatWork study on compensation programs and practices found most organizations (86 per cent) seek to align base pay with the median of the market. Similarly, 71 per cent indicated they target the median for total cash compensation (defined as base pay plus annual incentive opportunity). The study covered responses from 1,080 association members in compensation-related roles.
Interestingly, the study found “in practice, fewer organizations achieve this objective” – with only 67 per cent delivering median base pay levels and 54 per cent delivering median total cash compensation. While only six per cent of respondents indicate they target base pay below the median, 19 per cent actually pay below the median.
Similarly with respect to total cash compensation, only five per cent say they target pay below the median, but a full 20 per cent actually pay below the median. WorldatWork notes “a higher percentage of organizations pay above median than is targeted as well, although the differences between practice and targets are much less pronounced.”
Sometimes market trends show instructive shifts in design approaches. For example, the WorldatWork study found the use of traditional salary structures has increased while the use of broadbands has declined. A full 86 per cent of organizations report using traditional salary structures, which feature much narrower salary ranges than broadband structures, up from 73 per cent in 2010.
Notes WorldatWork: “Broadbands, which enjoyed a proliferation in the late 1980s and early 1990s, are now used by only eight per cent of respondents.”
With respect to pay for performance, 71 per cent of respondents indicate they have a formal employee performance rating system and that the performance score is tied to salary increases. Some 17 per cent report they apply performance ratings, but the scores are not tied to salary increases. An additional 11 per cent indicated they assess performance but do not use performance scores at all.
While it’s helpful to understand market trends, such inputs shouldn’t eclipse an organization’s own thinking around its objectives and priorities. Considerations such as affordability, cultural norms, the ability to measure and track results, and the availability of time and resources to manage programs should all factor into design decisions.
For example, while pay for performance represents a prevalent approach to compensation management, it may not be right for every organization or every employee group. And while many companies seek to align themselves with the market median, the reality is not every organization does, or can actually afford to do so.
From a continuous learning perspective, there’s value in staying on top of human resources and compensation literature as we can always gain new insights from what’s happening at other organizations. But at the end of day, we need to implement programs that are right for our organization versus simply trying to imitate what others are doing – even if that means marching to the beat of a different drum.
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.
Claudine Kapel is principal of Kapel and Associates Inc., a human resources consulting firm specializing in compensation design, performance management, and employee communications. Claudine is also the co-author of The HR Manager’s Guide to Total Rewards and Straight Talk on Managing Human Resources.