Why not open the compensation hood, poke around and make some changes?

Economic turbulence can take its toll on an organization in many ways — including leaving compensation programs and practices in a state of disarray.

That’s because cost-cutting measures can have a significant impact on jobs and job content, as well as on how compensation programs are maintained and administered. This can lead to disconnects in how jobs are compensated.

An effective compensation tune-up, however, can help identify and correct pay issues before they become corrosive.

A thoughtful diagnostic effort should seek to address three key questions:

• Have jobs changed?

• Are employees still being paid fairly and competitively?

• Is the organization still in compliance?

Let’s explore how these questions can help employers ensure compensation programs remain — or return — to a state of alignment.

Have jobs changed? This is a foundational question because organizations need to be monitoring how jobs change or grow over time to ensure employees continue to be compensated appropriately. When a job experiences a material change in scope — potentially through expanded responsibilities or the addition of staff — it may warrant a higher level of compensation.

And the reality is jobs sometimes undergo significant change when an organization restructures or downsizes. Some jobs may disappear while others may expand in scope as accountabilities, workload and staff are redistributed in the wake of organizational change.

It is important to review jobs that have experienced a change in scope to ensure they are positioned at an appropriate organizational level. This may involve re-evaluating such jobs through an organization’s formal job evaluation system, where such a system is utilized or required for pay equity compliance. This type of review helps ensure an appropriate alignment between job content, job titling and compensation.

Tune-up tips

• Review jobs that may have experienced a material change in scope and reposition them in the job hierarchy, as required.

• Look at jobs at the same organizational level and ensure titles all make sense.

• Establish titling conventions if required.

Are employees still being paid fairly and competitively? It’s easy to put pay competitiveness on the back burner during challenging economic times. Lean compensation budgets can translate into limited or no dollars for merit increases — and limited or no dollars to adjust salary structures. At the same time, hiring levels decline in the market, leading to less movement and lower employee turnover.

But, invariably, the economy does turn around. Suddenly, job openings are more abundant and the acquisition and retention of talent become higher priorities.

This shift in focus puts the spotlight back on compensation practices in general, and on the competitiveness of pay in particular. In the wake of lean times on the compensation front, it can be helpful to undertake a review of pay practices, considering both market competitiveness and internal equity.

One key area to examine from a market perspective is the extent to which an organization needs to adjust its base pay structure to ensure it keeps pace with labour market inflation. Consider how the market has shifted in recent years versus what the organization has done in the area of structure adjustments. If the organization hasn’t updated its base pay structure in several years, it may be quite out of step with the market. It might be a good idea to revisit the structure in its entirety with fresh market data, versus just updating the structure by a certain percentage.

Another area to examine is how employees are paid versus market — the organization may have slipped in terms of market competitiveness. Pay particular attention to critical talent who may be in high demand and short supply.

But effective compensation management isn’t just about the competitiveness of pay levels. Internal equity is equally critical. Misalignments in internal pay practices can foster employee dissatisfaction and erode trust. Over time, they can undermine employee motivation and performance and prompt individuals to seek employment opportunities elsewhere.

So, in addition to reviewing how pay stacks up against the market, also look at how pay levels compare internally. Are there differences in pay for employees in the same job or at the same level? Can differences in pay be explained in terms of differences in performance levels or time in the job? If not, there may be some internal equity issues to deal with.

Sometimes these issues can creep into a pay system because the market rate for a job becomes higher than what the organization is paying existing staff. This is referred to as pay compression. It can happen, for example, when the minimum wage increases — as has been the case in many provinces. Suddenly, the starting rate for an hourly job becomes the same — or even higher — than the rates of pay being offered for more experienced staff.

There is typically no cost-free way to fix a compression issue and restore internal equity. It generally requires money to ensure more skilled and experienced employees earn more than more recent and less qualified hires.

Tune-up tips

• Make sure the base pay structure has been updated to reflect current market pay practices.

• Conduct a competitive market analysis to test the pay competitiveness of benchmark jobs. This review could help update base pay structure as well.

• Review how employees in the same job are positioned in their salary range to ensure those with similar experience and performance are paid comparably.

• Check the internal distribution of employees in the same job to ensure the distribution is defensible.

Are you still compliant? In the rush of dealing with day-to-day pay administration issues, it’s easy to forget compensation management also involves ensuring legislative compliance. Three major legislative areas that can have direct implications for compensation management include pay equity, employment standards and human rights.

A comprehensive review of compensation programs and practices should include an assessment of any circumstances that could leave an organization offside from a legislative compliance perspective or vulnerable to a complaint.

For example, if an organization is covered by provincial or federal pay equity legislation, it is advisable to confirm it is still in compliance. Similarly, if employees are paid at or near the minimum wage, check to make sure current wages are in compliance with the latest minimum wage standards in each province.

Tune-up tips

• A review of pay practices through the lens of internal equity can help you identify issues that could put the company offside with employment legislation.

• Monitor changes in legislative requirements to stay on top of compliance requirements. Minimum wage increases in numerous provinces and revised pay equity legislation in Quebec are examples of recent changes that could have implications for your organization.

Overall, it is important to manage pay in a congruent manner. Otherwise there may be points of friction that, over time, will distract and dismay employees. Compensation programs that are well-designed and well-managed will foster higher levels of trust and performance and support a stronger focus on what matters most to the business and its customers.

Claudine Kapel is principal at Kapel and Associates, a human resources and communications consulting firm based in Toronto. She can be reached at (416) 422-1636 or [email protected]. Barbara Schaaf is a senior consultant at Kapel and Associates. She can be reached at (416) 655-8761 or at [email protected].