WHAT’S A COMPENSATION PACKAGE?
A compensation package is the combination of the total salary and benefits an employer provides to an employee. Compensation packages depend on the employer, position, and employee. Job seekers should consider the total compensation package being offered when deciding between multiple job offers.
To hire and retain the right talent, organizations need to develop a compelling total compensation package. This is especially true today, when the unemployment rate for college-educated workers is at an all time low, and high performers have many choices in terms of where they commit their time and talent. In sectors flush with cash like tech, organizations have engaged in fierce bidding wars, with each side raising the stakes with more and more cash and perks in order to win over top talent.
However, every organization has a finite budget for staff. And it doesn’t make business sense to try to please everybody. Creating a compelling total compensation package is really difficult for three reasons:
- Unless you’re Google, you have a limit on your budget and need to make some trade-offs between what you offer and what gets cut. Yet, employees have heard about all kinds of new benefits and are increasingly asking you whether you will offer this or that.
- You have to figure out what’s actually meaningful to the people you want to hire and retain.
- Your employees may not know or appreciate all that your organization has to offer. Over time, shiny new benefits become the norm, and employees take them for granted.
Recently, we hosted a webinar to give HR professionals more ideas and insights into this ever-evolving challenge. We invited three HR leaders from BambooHR, Prezi and PayScale to share their perspectives on how organizations can succeed in this arena, regardless of their budget.
In that webinar, the three HR leaders talked about the key elements for organizations to think through, offered up frameworks and checklists for making choices in comp and benefits. They also provided advice on how HR professionals can use thoughtful communication to change the way their employees perceive their total compensation package.
WHAT SHOULD A COMPENSATION PACKAGE INCLUDE? EXAMPLES
Compensation packages vary by employer and position. These packages include base salary, benefits, and perks decided by the employer. There are many different perks and benefits that companies offer, but here are the most common items included in compensation packages:
- Salary/hourly wage, bonuses, and/or commissions
- Retirement savings plan
- Medical, dental, vision, life, and disability insurance
- Paid time off (may include vacation, sick, personal, holiday, etc)
1. Be Clear About Who You Are and Who You Want to Hire
More than anything else, before you evaluate specific items, it’s important to be clear about what sort of people you want to hire, and know what motivates them. If you have multiple locations, it’s really important that you look at each location separately and find out what’s considered important to your employees in each place.
You’ll want to be clear about what you value as a company. Your values will be your north star, the lens through which you make decisions about how you want to spend your budget. Here’s a list of questions for you and your team to consider as you build out your total compensation package.
- What is your company’s “why”? In other words, what’s your company’s mission, vision and values?
- What makes you unique as an employer?
- Who do you want to hire? Which jobs are the most critical hires right now?
- What keeps your current staff around? What do they value most about working at your organization?
- What is your compensation philosophy and strategy? For example, for base pay, do you want to lead, match or lag the market? Does this stance align with what you want to achieve as a business?
- What is your stance on pay for performance? What types of behaviors or results do you want to reward?
- How can you reinforce your values through variable pay? For example, if you value teamwork; do you have team-based incentives?
- Are the benefits you provide aligned with your core values as a company? For example, if you say your company values healthy employees or work-life balance; can you provide something to incentivize your employees to actually unplug and relax?
- When you’re evaluating a new benefit, are you considering if it’s something that’s equally meaningful to all employees? For example, a free monthly bus pass is something employees who live close to your physical location would like, but those who work remotely from their homes wouldn’t be able to benefit from it.
2. Use the Iron Triangle Framework to Evaluate Trade-offs
Ever heard of the project management triangle? It’s also called the Triple Constraint, and the Iron Triangle. It describes the trade-offs you have to make to complete a project. It puts quality of a project in the middle, and it contends that:
- The quality of the work is constrained by the project’s budget, deadlines and scope (features).
- The project manager can trade between constraints.
- Changes in one constraint necessitate changes in others to compensate, or quality will suffer.
For example, a project can be completed faster by increasing budget or cutting scope. Alternatively, increasing the scope may require similar increases in budget and time. Cutting budget without adjusting schedule or scope will lead to lower quality.
You can think about your total compensation package in a similar way. Put employee experience in the middle instead of quality. The experience your employees have with your organization is influenced by three elements: 1) compensation, 2) benefits and perks and 3) culture.
Culture is this catch-all bucket of things employees value about working at your org; it can include the way people work as a team, the casual/relaxed work environment, the caliber of co-workers they get to work with, or how easy it is for an employee to approach the CEO.
To get employee experience right, you want to start by having a defined point of view on compensation, because comp is the largest portion of your expense. You’ll want to make some choices on what you want to reward (skills, experience, tenure, performance, a combination of things, etc). You also want to decide whether you want to lead, lag or match the market in terms of comp (how you pay relative to the market can vary by the job function or by the position).
You’ll make these choices based on your culture and what you’re trying to achieve as a business. But if you decide to under-index in compensation (e.g. decide to pay below market because you’re an early-stage startup), that is okay. However, you still want to provide a great employee experience; so, you’ll need to determine how you want to offset the lower pay through your benefits (health insurance, financial education, wellness, education reimbursement, etc.) and culture.
For example, the author of this piece had previously worked at an early stage startup where base pay was below market; but the variable pay (contingent on meeting team goals) was significant. The organization gave her a high degree of autonomy and opportunities to accelerate her career. They added other perks such as giving employees opportunities to have conversations with their board members and investors. The company had made choices to attract individuals who were willing to take lower pay for growth opportunities difficult to find in more mature organizations.
3. Communicate Your Total Compensation Package Clearly
Cash, benefits and perks lose their appeal over time, and you don’t want to keep escalating the amount of cash or perks you offer to get people to stick around. What matters is that your employees feel valued. To invoke this feeling, you’ll need to set and communicate the appropriate expectations, and then remind employees regularly about what you’re offering.
Here are some principles to guide your communication efforts:
- Talk About Compensation on an Ongoing Basis.
Talking about pay should be the most important conversations you have throughout the year. These conversations matter because they help the employee and the organization remain in sync about what’s expected in terms of pay and performance. Employees often become less than productive because they don’t have clear goals in their line of sight. Giving employees clarity into how salary decisions are made and what they need to do to increase their earnings will help them stay focused on doing great work. Here are some tips to master these conversations:
- Talk early and often. When you sit down with an employee to talk about salary, there shouldn’t be any surprises. Talk about compensation with new employees during the onboarding period. Talk about why their pay is set at the current level, and what kind of bonus or raise the employee might receive if she meets her goals — or doesn’t. Then have check-ins throughout the year to talk about how the employee is performing. That way, she won’t be taken aback by your formal evaluation and salary decision at review time.
- Prepare your managers for pay conversations. PayScale research found that most HR professionals do not have faith that their managers are having effective pay conversations with employees. It’s important that your managers walk into the room with a plan. Make sure to teach your managers things such as the rationale that went behind the decision-making about an employee’s pay, and how to listen to employees’ concerns about their salary or other aspects of their job.
- Talk About the “Why” Behind Your Choices
Whether you’ve allowed employees to work remotely or you’ve launched a new employee wellness program, you’ll want to tell employees why you’ve made this choice. What prompted HR to offer this benefit or program? How will it benefit employees? And most importantly, how does it connect back to the things you value as a company?
Given that your budget and people resources are finite, you have to make trade-offs and you can’t please everyone through your decisions. Some employees may be disappointed that you’ve chosen NOT to offer something their friends have at work. What matters is that you clearly communicate how you reached your decision, which options you did consider, the trade-offs you had to make and what criteria you used to make the decision.
- Find Employee Champions
If employees don’t even know that you have certain benefits, you may consider getting other employees to do the marketing work for you. Find employee champions who love that benefit and get them to talk about why they love the benefit with other employees.
For example, Prezi had an “international exchange program”; they gave their employees the opportunity to work in their global offices, live in new places and learn from colleagues from other cultures. For a while, few employees applied for the program. But then, the HR team found employees who participated in the program and got them to share their stories with colleagues. After that, the application rate to participate in the program skyrocketed.
Tell Us What You Think
If you have any tips on designing or communicating a total compensation program you would like to share with our community, please comment below or tweet at us at www.twitter.com/payscale.