Compensation Analysis: Create a History of Pay for Performance
In our previous discussions on compensation analytics, we discussed why taking the time to review the effects of your compensation plan is valuable to a company and, also, how to perform an analysis of your salary ranges. In this next post on compensation analytics, let’s consider the company that has made a commitment to paying for performance and see how that company can assess whether it is really doing so. Do you really have a history of pay for performance at your organization?
Compensating Your Top Performers
I think that ensuring that you pay for performance is one of the most critical areas in compensation analysis because if you find and hire top talent, and promise them you’ll pay them well, you need to do so. Otherwise, you’ll quickly lose those innovative folks to competitors.
Here is a common way that pay-for-performance gets watered down. Perhaps you are using the common pay formula of making standard cost-of-living adjustments and then adding merit increases on top of that. But, your budget for doing so is only 4-5 percent and the market is moving an average of 3 percent. How can you move top performers through their range? You don’t have a lot of room to reward them.
If this is the case for you, it may be time to consider challenging the status quo by eliminating across-the-board increases if you want to stand out as a true pay-for-performance company. Keep in mind, this approach isn’t appropriate for every organization. But, if your organization says it rewards, pays for and relies upon top performers, then your actions should back that up. And, your compensation analyses should back that up, too.
Using Compa-Ratios as Guideposts
One way to check on the health of your pay-for-performance practices, and create a documented history of pay for performance, is to look at compa-ratios. Your top performers’ pay should stand out when compared with their peers’. I recommend that you create a system that seamlessly integrates performance and compa-ratios if you want to have that balance. For more information on this process, see our blog post The Salary Review Process.
Below is an example analysis of performance ratings and potential ratings matched to compa-ratios. Performance ratings show how the employee is rated for their current performance. Potential ratings tell you how much that employee is expected to contribute in the following year. A compa-ratio lets you know how that employee’s base salary compares to the midpoint of their assigned salary range. For example, a compa-ratio of 1.2 means that a person is at 120 percent of the midpoint of their range.
You can see that the compa-ratios in red are for employees who have low performance but are already high in their salary range. In contrast, the compa-ratios in green are for employees who are performing well but have not arrived at the midpoint for their pay range.
|Job Title||Performance Rating||Potential Rating||Compa-Ratio|
|Director of Marketing||3||Medium||1.661|
Ask Questions First
You may want to assume that the employees with compa-ratios in red do not deserve merit increases and the employees in green do. But, don’t jump too soon. There may be a history to the situation that you don’t know.
It is important to use your compensation analysis as a reason to ask questions, not make declarations. Before you take action based on these numbers, talk to these employees’ managers and other people in leadership positions at your organization. You can ask, “Why is this person at a low performance rating but has a high compa-ratio? And, if there is a proposed increase for this person, why is there?”
Compensation Analysis Helps You Walk Your Talk
Hopefully, if you are a pay-for-performance organization, once you get in the habit of looking at your compensation patterns for high versus low performers you’ll better ensure that you are walking your talk. Plus, you’ll have a documented history of pay for performance to prove that you practice it.
In our next discussions of compensation analytics, we’ll look at how to use it to ensure external and internal pay equity.
Director of Customer Service and Education
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