Getting to the base of competitive pay

Base pay audits ensure return-on-investment, and may not be as painful as you imagine
By Tammy Van Eck and Erin Konkle
|Canadian HR Reporter|Last Updated: 02/26/2003

Human resource professionals sometimes worry a base pay system audit will end up increasing costs. And who wants to do that? But an audit — and any corrective action — can actually result in cost savings by ensuring an organization’s investment in base pay provides an optimal return.

The setting: Why perform a checkup?

A base pay system is a combination of the programs and processes, which typically include a job evaluation program (see accompanying article), base pay structures and pay administration processes.

A base pay system audit typically considers both the context (business environment and employment deal) and the content (specific practices) of an organization’s base pay system, and examines how the system:

•supports the business strategy and compensation philosophy;

•serves as an effective attraction and retention tool (compares favourably to competitors); and

•is well understood by employees with clearly articulated administration guidelines.

In addition, a sound base pay system audit will help companies comply with applicable laws and regulations, such as pay equity for Canadian firms.

Supporting business strategy, compensation philosophy

A compensation or rewards philosophy serves as the backbone of a base pay system, and provides a framework for the design and administration of base pay programs.

The philosophy should be aligned with the organization’s business strategy by ensuring pay programs attract, retain and engage the talent required to deliver business results.

The compensation philosophy is typically a written statement outlining the role of each compensation element, as well as the desired competitive positioning, comparator groups, pay mix, and pay-for-performance links.

Questions to think about when assessing the need for an audit include: Do you have a well articulated compensation philosophy guiding the design and administration of your base pay system? And, to what extent is the philosophy aligned with your business strategy?

An attraction and retention tool

While the entire pay system can impact attraction and retention of talent, the base pay structure — and more importantly actual base pay levels — play a significant role in attracting and retaining talent. Towers Perrin’s

Compensation Effectiveness Survey

reveals competitive base pay is the top attractor among a number of elements of a job. In this 1999 survey of 771 companies, pay was deemed more important than opportunities for advancement, competitive health-care benefits, work-life balance, recognition for work, challenging work, learning and development opportunities or a competitive retirement package. Canadian companies make up roughly one-quarter of the firms surveyed.

Assessing the market competitiveness of pay levels involves comparing the pay of benchmark jobs in an organization against those of suitable organizations (as identified in your compensation philosophy).

Some things to consider when determining suitable comparator organizations include:

•industry type;

•relative financial performance;

•organizational size (revenue and employees); and

•span of data (national versus regional or local).

Selecting suitable comparators also includes considering where you are attracting talent from and where departing talent are going.

When assessing whether a base pay structure is effective in attracting and retaining talent, consider the following: Does the current structure allow you to attract and effectively reward the talent required to deliver on the business strategy? Does the structure support the differentiation of pay for high performers and critical skill employees, or is re-evaluation of jobs often required to support significant pay increases?

Communication, administration key ingredients

Achieving an optimal return-on-investment in base pay dollars means not only ensuring the base pay system is well structured, but that employees have a strong understanding of the various programs and how to increase their base pay. It should be clear to employees on what basis their base pay will be adjusted (Is it tied to performance, demonstrated competencies or time-based?).

Clear pay administration guidelines that define parameters for making pay adjustments help managers deliver consistent communication around base pay.

Developing managers as effective pay, reward communicators

While opportunities clearly exist for HR to better articulate and disseminate information about pay, the real opportunity in enhancing employee understanding of pay lies with managers. Research supports this notion. According to a Towers Perrin

Compensation Trends

survey of 89 Canadian firms last October, two-thirds of the responding organizations rated their managers as only “somewhat effective” in educating employees on how they can contribute to, and be rewarded for, the achievement of business goals.

A top human resource issue at many organizations is how to motivate and reward employees when base pay dollars are limited. Managers need to be more effective in administering and communicating pay to improve levels of employee satisfaction, retention, engagement and, ultimately, business results.

As the trend continues for line managers to take on greater responsibility for the administration of pay, companies have to focus on developing managers as effective pay and reward communicators, and on measuring their efficacy in this regard.

Questions to consider in assessing the effectiveness of the communication and administration of base pay include: How well do managers and employees understand your base pay system? And how proficient are managers at administering and communicating base pay?

Ongoing improvement process

While the objective of a base pay audit (and any followup work) is an effective pay system that serves to attract, retain and engage the right employees, bear in mind that both employer and employee needs are subject to influence by external and internal factors, and are therefore open to change.

While an in-depth base pay audit is not typically required on an annual basis, companies should seek out constant feedback from employees and managers on how well the pay programs and processes are supporting the business. This allows continual improvement and identifies the need for any fine-tuning.

At the end of the day, remember the following: regular checkups are recommended for early diagnosis of ailments. The result is an overall healthier base pay system.

Tammy van Eck is a compensation consultant and Erin Konkle is an associate compensation consultant in Towers Perrin’s Toronto office. Tammy can be reached at (416) 960-2652 and Erin can be reached at (416) 960-2846.

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