Defining Compensation Plans
Explaining compensation to an employee should be simple. In its most basic form, compensation addresses what are known as “extrinsic rewards,” which are rewards that are provided by the organization in the form of financial, material, or social rewards. The reason compensation plans are so difficult to define is because there are so many factors that go into developing compensation. The world of compensation has unique definitions, designs and functions. How do you make them easy for a non-HR savvy employee to understand? The following are a few ideas on how to communicate your compensation plan to employees.
1. Pay Grades – How to Explain Basic Pay
Many organizations, including the military, use compensation plans that are based upon pay grades or pay scales. Organizations usually design these by looking at the positions in their company and identifying such basic factors as education needed, tasks involved, skills used and abilities required. Developing a set pay scale makes compensation more clear because it delineates to the worker what their base compensation will be based on their time in a position.
The military, for example, uses a multi-axial approach meaning that people in the military are paid based on their rank, and their time in service at that rank. A transparent compensation model like this can make communicating with subordinate employees somewhat daunting, because they might know what you earn in a base year salary. But, this type of device works well because employees know immediately from the start what their base income is, as well as where they might be financially several months or years from now. This method of delineating and communicating compensation grades works for most positions, but not all, e.g. CEO or sales.
2. Compensating Differences – Seeing the Glass Ceiling
Employees can be motivated by knowing there is a lot of room to grow in their industry or job position. The pay they start out at can be influenced by how much their base salary can grow. For example, their pay may start low but have a lot of room to expand with experience. Or, if more years of work won’t make them better at their job, they may get their highest pay right from the start. It’s important that they understand this fact.
As an example, high school graduates should be equally ready to take positions both in manual labor, as well as positions in retail. Usually the jobs involving manual labor pay higher initial wages than those jobs requiring schooling. This is because the job ladder for manual labor jobs tends to be short, or even non-existent. Much in the same way that established pay scales provide advanced knowledge of extrinsic rewards to come, employees who are provided their own job ladder within their career field may understand why there is a initial compensation difference between their own job and someone else’s.
3. Identifying Wage Differentials - What Is the Theory of Compensating Wage Differentials?
What are wage differentials? According to the book “Microeconomics.” wage differentials are those differences in wages between various workers, groups of workers, or even differences between workers within a career field. For example, a worker with many more years of experience than another worker, although both of their jobs require the identical tasks, might make significantly more than a worker who is just beginning in the same field. Although not always confined to experience, there are certain qualities in a worker – experience, education, certifications - that might create wage differentials within the same job field.
It is important, in some manner, to identify and document when a wage differential is appropriate, so as to prevent both confusion and a sense of inequity on the part of those who don’t understand it. A recommendation would be if there is a group of workers who have specialties in your workplace, e.g. different types of surgeons, it would be helpful to identify and support your pay practices for them through the use of job titles. The job titles can help set apart those who are considered more advanced in their career expertise.
4. Benefit Summaries – Explaining Total Rewards to an Employee
How well do your employees understand their total compensation, - namely the amount of money spent on them by the company – outside of base salary? To communicate total compensation to employees, some organizations use what is sometimes referred to as an annual benefit summary. What this summary does is provide a detailed list of costs incurred by the organization to retain, train, support, and reward a member of that organization. There is nothing complicated about it, it just requires some research on the part of the person who is developing it.
An example would be if an HR benefits specialist wanted to write an annual benefits summary for an employee who currently receives a base salary, a company profit sharing bonus, fully paid medical/dental, and free parking. It would be very simple to build an annual benefit summary for that employee. The HR professional would simply put together a list of their benefits and annotate the cost that the company pays for each benefit on an annual basis.
This tool is useful for communicating compensation to employees, and sometimes eye opening for the employee, especially when they see how much an organization spends on fringe benefits. I’m even daring to say that the average employee has a very foggy view of what the business spends on their behalf for a benefit like medical insurance.
Of all the suggestions I have made to clarify and communicate your compensation plan to your employees, the summary of benefit is perhaps the most straightforward.
Beyond preparing a summary, remember the following tips:
- Develop compensation plans for your positions that account for education, skills, tasks and responsibilities in such a way that they make sense to an outside observer.
- Explain benefit packages in a manner that reminds employees that they are not intrinsic to the position itself.
- Make compensation predictable. Through the use of either an established pay scale, or even the pay-for-performance approach, employees can gain an understanding of their base pay and set goals beyond it.
- HR professionals and accounting professionals alike should make themselves readily available to explain compensation plans to employees. This not only increases the employee’s insight into what their company provides them, but also provides the resourcing professionals a chance to gauge the current applicable compensation plans against various job niches and titles.
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