Navel-gazing on salaries, bonuses

Internal compensation reviews provide clarity, equity, direction
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/18/2010

Coming out of the recession, companies may find themselves with a less-than-desirable compensation structure. With sporadic, deferred or non-existent pay increases and changes to variable pay, there’s a good chance some employee groups are overpaid or underpaid, or roles have changed significantly and compensation could need some adjustment to match.

“That has made for kind of a patchwork quilt right now because people are all over the place,” says Gail Evans, president of management consulting firm The Wynford Group in Calgary.

As a result, it’s a good time to conduct an internal salary review to be in a better position for recovery and growth.

“Many organizations look at the market as being one of the most critical drivers but it is still very important to have that internal equity within the organization,” she says.

These kinds of reviews should be done on an ongoing basis because salaries are in constant movement, says Dave Tyson, president of Tyson & Associates, a compensation consulting firm in Toronto. The major issue is maintaining consistency across an organization, especially as pay equity legislation is an under-observed problem and “a time bomb waiting to go off somewhere,” he says.

It’s about best practices, especially in light of economic considerations, says Susan Hunter, a senior consultant at at human capital consulting firm Aon Hewitt in Toronto.

“It’s very important, with the economy moving in a very positive direction, particularly in the attraction and retention of talent, that (employers) look at their compensation philosophy and program,” she says.

Of course, companies must look externally to assess the competition but the internal equation is absolutely necessary, says Hunter. That means figuring out where the company wants to be, who it wants to compare to and the desired positioning for the compensation program. These need to be explored to align with business strategy because compensation will reinforce that, she says.

“It’s a great time right now to sit back (and say), ‘Let’s just review those guiding principles or that compensation philosophy, let’s make sure it still aligns with our business,’” says Matthew Walker, manager of rewards surveys at Aon Hewitt in Toronto.

First steps

The first step is to assess the company’s situation, says Evans, which means deciding if the current compensation philosophy supports the organization’s strategic direction, both from an operational sense and a financial sense — what can the organization afford to pay?

“They need to decide has the company actually changed their strategic direction and, therefore, is the compensation philosophy they’re using, is that appropriate?” she says.

For example, if a company is paying at the 60th percentile for base pay, it might want to change the mix to have more variable pay to work with variations in the marketplace.

“That’s not an uncommon thing that I’ve been hearing, is to keep the base lower and focus more on a greater range of variable pay,” says Evans.

The employer must then pick some benchmarks that are representative of key positions in the organization, such as accountants, engineers or production-floor workers, says Evans.

“If the business has changed, perhaps there are some different needs or because of some reductions in staffing, maybe people have to have a broader range of skills or they’re doing a broader range of duties,” says Evans.

Some jobs may have changed dramatically while others have stayed the same, she says. For example, an organization might have sent transactional business offshore, which has left some workers doing more consulting instead of supervising transactional roles, says Evans.

“If that’s the case, then they in fact have some positions where even though the title may not change a lot, the actual focus and what they need to do and the skill set that they need may be different,” she says.

Before putting the matrix together, an employer also needs to look at the job evaluation system — are the factors still important? If a company has accountability banding, what is the accountability of the decision-making of individuals? The factors can vary. For example, in a research-driven organization, education might be the bigger driver or in sales, communication and revenue-generation skills may be important.

“You need to make sure those factors are still important,” says Evans. “You just need to confirm that those still fit with your business direction, your business drivers.”

As part of an internal compensation review, companies need to make sure they have an accountability framework that reflects the kinds of positions needed to drive results, says Hunter. That means figuring out if the right people are in the right jobs, doing individual employee assessments to see whether people are performing, she says.

Toeing the line

Then the company can put the matrix together and match key positions with key levels. So, for example, look at what a working-level engineer does, match it competitively with other organizations in the marketplace to decide what’s appropriate, decide what the pay line should be and then throw people on it and decide who’s on and who’s off, says Evans.

“There may be some who are way off. Those are ones, at this point, you probably want to make sure that you take care of if you have a budget to increase their salaries,” she says. “You may not be able to get exactly to that (line) but you want to work towards it.”

If it turns out some people are being overpaid, it’s really tough to roll back pay unless it’s being done to a larger group of people, says Evans. And if one person is picked out, it could be viewed as constructive dismissal so there’s the option of inducing people to leave or deferring pay increases until others catch up.

“With everybody just reorganizing and coming out of recession, there will be people who are overpaid relative to the current market and they will probably be red-circled and not receive an increase for a while,” she says.

No organization can afford to do a full sweep of changes so it’s about phased approaches, says Hunter. But companies should also confirm whether a job is in the right place or if the performance is there to warrant that compensation.

“That’s why we have ranges to rectify different levels of performance,” she says.

If a company can’t reach its desired position in the market right away, it can work towards it through other strategies, such as variable pay or lump-sum payments, says Tyson. But having people or groups who are overpaid is an ongoing problem, he says, and HR has two choices: Accelerate the other employees or put a hold on the pay of the overpaid, either by freezing pay or lowering the amount of increases.

“Both are tough choices and a lot of companies don’t face the problem,” he says.

And if there’s a situation where people are underpaid but HR lacks the budget to pull them up, the money can be taken from somebody else, staff can be laid off or contingency payments such as profit-sharing or bonus plans can be used. However, “that’s kind of dangerous, targeting one group with a profit plan,” he adds.

Communication is probably the most important part of this, says Walker. Employers can spend months doing the process properly so they have to let people know change is happening. That involves setting out the principles, linking the compensation structure to company culture and laying out the timeline.

“As long as you’ve been forthright at the front of the process, you’ll have a lot easier time getting employee buy-in,” he says.

Communication is always critical and it’s a big issue coming out of the recession, with people wondering where they fit in, says Evans.

“Going through this process, and if it’s communicated effectively, lets people know, ‘Yes, we do care, we are going to confirm that your job is where it should be relative to the market and we’re going to let you know what that is.’”

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