Even the most seasoned HR professional might take a big gulp if approached by their CEO to take charge of anything comp. That’s because, despite being part of the HR department, compensation is like the cool kid at a party. You know, the one you’re afraid to talk to. A bit mysterious, intriguing, and frankly, just seems way out of your league. Comp has its own language. Sure, you’ve heard some terms before, but you have no idea what they mean so you try to avoid the conversation altogether. Not to worry! PayScale has you covered in our new, 4-part Comp Glossary. You’ll be completely fluent in no time.
Today’s Lesson: Comp 101
Consider the comp pros at PayScale to be an extension of your team! We’ve compiled a list of fundamental compensation terms and why they’re important to know. Think of it as your comp cheat sheet – jargon you need to put you on the fast track to becoming that cool comp kid we know you can be!
1) PAY PHILOSOPHY
Definition: High level documentation on what you are trying to achieve with your compensation plan.
Why it matters: Your pay philosophy statement is typically something all employees can access (either in the employee handbook or via an intranet) and answers the question of why you have a plan in the first place. Because everyone can read it, the explanation is usually pretty high level and includes statements like “to attract, retain, and motivate employees” or “intended to be fair and simple.” The philosophy statement should also address what you plan to reward with compensation (performance, tenure, acquisition of skills, etc.).
2) PAY STRATEGY
Definition: The market you compete in for your talent and how competitively you wish to pay in that market.
Why it matters: Your pay strategy is a little more micro than the pay philosophy. It defines how you intend to enact your philosophy – what’s the plan of attack to ensure you achieve the goals outlined in your philosophy. Often included are details around how you define your talent market (who you compete with when hiring employees) and how competitive you plan to pay to the market (your target percentile). As such, the strategy is often seen only by the executive team, though companies who choose a higher level of transparency may decide to make this information public.
3) PAY POLICIES
Definition: Statements on how you intend to administer the compensation plan. Organizations who prefer the less formal terminology may refer to these as guidelines.
Why it matters: Your policies tell executives and managers how certain compensation-related transactions should take place. How and when will increases be determined? How do you plan to address employees who are paid outside of their range (red and green circled)? How are promotions, demotions, or transfers handled? Written guidelines or policies ensure the compensation plan is carried out as intended and, more importantly, that compensation is administered fairly.
4) PAY TRANSPARENCY
Definition: The level of information that is shared with employees regarding the company’s compensation plan.
Why it matters: More and more companies across all industry sectors are shifting toward an increased level of pay transparency as it can result in higher job satisfaction and higher intent to stay from employees. If you’re responsible for making recommendations to your leaders on what information to share with employees, it’s important to note that transparency is not an on/off switch. There are varying levels at which a company can be open about their compensation plan – this could include sharing information on your pay strategy, your market studies, pieces or all of your pay structure – without going so far as to publish all employees’ salaries.
The key with pay transparency is consistency. Whatever you decide to allow managers to share with their employees, make sure they are all providing the same amount of detail to their staff. If one manager shares more with their team, than employees may start to question the fairness of the plan (in addition to how uniformed their manager may be if he/she is not sharing the same information).
5) BASE PAY vs. VARIABLE PAY
Definition: Base pay is the fixed compensation an employee receives at regular intervals. Variable pay is compensation at risk, fluctuates based on employee performance/results achieved, and is typically a one-time payment that must be re-earned each performance period.
Why it matters: The fixed base pay (salary or hourly) is the guaranteed compensation your employees receive for their work performed. Variable pay is just that – it varies. Not just the amount, but the payout period, who is eligible for what, the metrics the employee is measured against, and so forth. Compensation plans can include both a base pay structure and a variable pay structure and there is a trend toward offering more “at risk” pay to employees to incite better performance and employee ownership of their compensation. Typical variable pay includes incentives, bonuses, commission, and profit-sharing.
Definition: Total Cash Compensation (TCC)
Why it matters: This is the combination of an employee’s base (fixed) pay vs. any variable pay they might receive including incentive payouts, commissions, bonuses, or cash profit sharing. As the name implies, TCC only applies to monetary compensation and should not include non-monetary items like employer contributions to benefits (including 401k matching), a car allowance, or cell-phone plan. Think of it this way – if the employee sees it in their paycheck, then its cash compensation. If your company has a high mix of base and variable pay for employees, it’s a good idea to evaluate your TCC to market TCC in addition to the typical base pay evaluation.
7) NON-EXEMPT vs. EXEMPT
Definition: Non-Exempt employees are those who are subject to the minimum wage and overtime pay provisions of the Fair Labor Standards Act (FLSA). Exempt employees are those who are not subject to (i.e., they are exempt from) FLSA minimum wage and overtime provisions.
Why it matters: As an HR Professional, you probably already know that getting FLSA classifications right is critical if you want to avoid potential legal issues. Remember that under the FLSA there is no limit to the number of hours that an employee may work, either daily or weekly. It simply requires that overtime pay must be paid at a rate of not less than 1? times the Non-Exempt employee’s regular rate of pay for hours worked over the maximum in a workweek. Jobs classified as Exempt do not have the same regulations in place and therefore must meet specific criteria to qualify for exemption status. These jobs are typically paid on a salaried basis.
Changes are currently being considered regarding what types of jobs can be classified as Exempt or Non-Exempt under FLSA – set to go live in 2016. Don’t assume that all your hourly jobs are non-exempt and your salaried jobs are exempt. If you are conducting an FLSA audit as part of developing your compensation plan, it’s a good idea to connect with an Employment Lawyer to confirm your classifications are correct.
Check out Part 2, Part 3, and Part 4 of our comp glossary!
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