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Why Develop a Competitive Compensation Plan

Ways to Beat Your Competition with Your Compensation Plan

By Staff Writer  

Your company is likely already looking to profit in all of the obvious ways, like sell more products, buy better equipment and invest in more lucrative locations. But, has your company leadership considered that they can beat their competition with smarter compensation planning? Any HR person knows that this approach is not only possible but essential. The key is to know how to get it done.

Learn the 5 Easy Steps to a Smart Compensation Plan Discover the basics to developing a compensation plan.

Are you ready to take the lead at your company and answer the question, “Why develop a competitive compensation plan?” Good, you’re in luck. Below we have collected wisdom from our many Compensation Today posts telling you how to be different that your competition in your compensation planning.

1. Properly compensate your new hires.

From To-Do List for Human Resources Planning

When you hire a new employee, what you pay them can set the tone for long-term satisfaction or disappointment with their compensation. If your organization notably under- or over-pays your new hires, you  run the risk of losing good talent or creating employees  who expect more than they have  earned.

“New Hire” To-Do List for Human Resources

  • Be realistic. People know what they are worth. Even if they accept a position at below-market wages, they may bear resentment toward the organization (and ultimately leave).
  • Manage your managers. Rogue hiring managers do not always serve the organization’s best interests. Whether they want to pay too little or too much, they waste financial and talent resources. Make sure they are aware of what they can offer and why.

2. Deepen your knowledge.

From Setting Compensation Budgets

The knowledge you need includes awareness of the regulatory environment in which you are operating. If you work in the manufacturing industry, you have different issues to handle than in the healthcare industry. But, both industries require specific know-how if you want your company to excel and avoid legal trouble.

3. Determine how competitive do you want to be relative to the market.

From Employee Compensation Plan Design

You will need to decide how competitive you want to be relative to the market. Your organization’s competitive positioning will depend on many variables which may include:

  • the outlook for growth over the next year and beyond
  • your company’s ability to attract and retain talent
  • your industry
  • your overall philosophy on pay


Many companies choose to target the market somewhere between the 40th and 90th percentiles.

4. Explain total rewards to your employees.

From How to Explain Employees’ Total Compensation

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.

Beyond preparing a summary, remember the following tips:

  • Develop a compensation plan for your positions that accounts 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 their compensation plan 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 plan against various job niches and titles.

5. Think before you cut.

From Reasons for Company Layoffs: Save Costs without Salary Freezes

There is nothing worse than taking money away from employees. In most cases, targeted and smart layoffs are easier for the organization to recover from than taking money away from employees. Not to mention that it is a lot easier to save dollars by focusing on a few employees than by taking a little bit away from everyone. Most Americans are living paycheck to paycheck. A reduction in pay can mean the difference between meeting all of their financial obligations or not. In our society today, too many people are living too close to the edge to absorb this type of financial hit.

One way to think about this is from a personal finance perspective. If you really needed to save money in your household, you would cut back on non-essentials, such as eating out, travel, clothing and movies, rather than reducing what you pay on your mortgage or electricity bill. By giving full support where your crucial functions are, much like keeping a top performer at their full wage, you increase your chances of surviving tough times.
  
6. Remember the key issues covered by a successful employee incentive plan.

From Successful Employee Incentive Plans

  • Who are you going to incent?
  • How much are you going to pay, and for what result?
  • How are you going to deliver the employee incentive - monthly, first-dollar, quota attainment, etc.?
  • And, a key question that Payscale.com can help you answer: Is your total pay package competitive when you include your incentive compensation plan?

7. Equip your managers to have effective conversations about compensation.

From Compensation Planning Mistakes

Explaining your compensation plan is a big responsibility. If managers do not have a compensation communication strategy and explain individual compensation decisions credibly, at best, they put employee morale at risk. At worst, they put the organization in legal jeopardy.

Here are tips for improving communication from managers:

  • Train your managers. Many organizations invest in management training for hiring, anti-harassment and performance appraisals, but neglect to train managers on how to talk about compensation.
  • Check their answers. Your managers will be asked difficult questions. Can they answer these questions to your and the organization’s standards?

How does the organization set salaries?
Why did I only get this much money?
Why did my colleague get that much money?
What can I do to maximize my earning potential at this organization?
When can I expect to see my hard work turn into better compensation?

8.  Get buy-in on your company’s compensation policy.

From Employee Compensation Policy

Gain approval. Generally, it is the board of directors that approves the final policy, but these aren’t the only people involved in developing your policy. The top executives such as the CEO, COO, and CFO have input to the overall goals and objectives of the compensation program. The human resources professional serves as the expert regarding items to be included in the policy. Your organization may also choose to create a compensation committee consisting of individual stakeholders from different departments including some managers and employees as an internal control measure, as well as an employee engagement strategy.

9. Write a compensation philosophy.

From Developing a Compensation Philosophy

The following are tips for creating a lasting compensation philosophy:

  • Be as concise as possible. Your philosophy should be about two paragraphs in length.
  • Maintain an optimistic yet realistic tone.
  • Keep in mind that the organization has and will go through changes. Policy can change, but remember, your compensation philosophy should weather these changes with few adjustments.
  • Ensure that your philosophy reflects some of the values already listed in your company’s mission statement.
  • Consider using general language such as “attractive, flexible, and market based pay”, “competitive in recruiting and retaining employees through high-quality compensation plans”, or “compensation program aligned with shareholder interest.”

10. Target pay rates appropriately.

From Establishing Competitive Pay Rates

Understand the job. If you haven’t yet, correctly define the job for market pricing. When you are targeting pay rates for positions, you’ll want to correctly define the full proficient employee who has average performance. This centers your market compensation data at the midpoint on the typical employees. Those that are new to the position or have less than acceptable performance will be below your target pay rates, and those with more experience, education or certifications than required, or those with outstanding performance, should be above your target pay rates.

Related Posts:

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.

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