For many organizations, compensation is one of the most daunting areas of running a business. How do you know what to offer new hires, how to decide whether employees should get raises, and how to stay both competitive and compliant in a tight job market while not overpaying? Do you need a compensation manager?
Smaller organizations often do not have a dedicated person with expertise in compensation management. In small to medium businesses, someone in HR or Finance might be responsible for keeping track of employee salaries and setting compensation structures. Sometimes, no one is responsible for compensation holistically and business owners or executive leaders rely on outside consultants or make individual decisions about pay based on input from hiring managers on employee performance. However, as organizations grow, compensation management becomes increasingly necessary. In organizations with 250-500 people, it’s common for at least one person within the HR function to manage compensation as part of their job description. In organizations with 500-1,500 people, we tend to see two or three people forming a compensation team. There might be a compensation manager as well as a compensation specialist, admin, or analyst. The compensation manager or team usually reports to a director or vice president of HR, People, or Finance.
Compensation management is necessary to control expenses and attract and retain top talent. It’s also an important part of employer branding and employee communications. When there are a lot of employees, compensation management is a full-time job that includes setting a compensation budget, forming pay structures, researching salary market data, ensuing compliance with state and federal law and regulations, updating job descriptions and classifications, and training managers on pay communications. Sometimes benefits are part of compensation management and sometimes benefits are managed separately. Organizations without a dedicated compensation team may choose to contract all or a portion of the compensation and benefits management functions to HR consulting firms, which is one way to reduce costs and increase access to subject matter expertise. But, because compensation is a permanent conversation, most organizations eventually feel that it makes sense to have a compensation manager own and drive their compensation strategy after the organization gets to a certain size.
So, how do you know if you need a compensation manager for your team? Other than company size, we’ve put together the top five signs your company would benefit from bringing a dedicated compensation manager on board. Read on to see if any of these scenarios are familiar to you.
1) You lack compensation practices or haven’t reviewed them in a while.
Are your current compensation practices nonexistent or outdated? A compensation manager could answer that question for you. There are many ways a compensation manager can improve the pay practices of your organization, including:
- Researching competitive pay and setting the organization’s compensation structure.
- Collaborating with finance to set the budget for compensation and benefits.
- Creating and evangelizing your compensation philosophy and compensation strategy.
- Counseling upper management and HR on compensation best practices.
- Keeping apprised of industry legislation and regulations to maintain compliance.
- Overseeing pay communications and the distribution of compensation and benefits information to employees.
- Selecting and managing outside partners, such as benefits vendors, insurance brokers, and investment managers in addition to coordinating and supervising the activities of internal specialists and support staff.
2) You struggle to hire top talent and your most sought-after candidates reject your offers
Smart hiring is one of the most important pillars of a strong organization. You work hard to recruit the best people, so when it comes time to extend an offer, you want that offer to be competitive, both within your industry and within your geographical location. Occasionally, you also have to think about compensating more for hot skills, especially top technology skills that are commanding premiums in the job market.
If hiring managers are extending offers only to have them rejected by strong candidates who choose to work elsewhere, it is time to review your compensation strategy and figure out where and how your offers are missing the mark.
A good compensation manager will advocate for the use of multiple salary market data sources to help you determine competitive pay. Your compensation manager will also create and maintain positive relationships across the organization including with core HR functions and Finance functions to ensure everyone understands your compensation philosophy and structures and how both tie into your employer branding.
A compensation manager may also work to establish a pay brand and potentially monitor what former and current employees are saying about your organization’s pay practices and benefits on Glassdoor and other review sites that impact candidate perceptions of your organization.
3) You suspect compensation is tied to low retention and high employee turnover
Why are people leaving your organization? This is the number one question to ask when it comes to higher-than-desired employee turnover. Employees leave jobs for many reasons, so a certain amount of turnover is expected, but it’s important to know if you are above or below the average for your industry and why. A survey by LinkedIn found that the overall annual global turnover rate is 10.9 percent.
Turnover is expensive. Most organizations spend a significant amount of money every year on hiring and training employees. According to SHRM, replacing an entry-level employee costs 50 percent of their annual salary. That figure increases as much as 250 percent when replacing those who are your most highly-skilled employees or those who leave leadership positions. Generally, it costs less to retain skilled workers than it does to replace skilled workers.
Don’t let compensation be the reason you lose great employees. According to previous research from PayScale on “why employees quit”, the top reason employees give for seeking employment outside of their current organization is higher pay. A compensation manager can help you discover if compensation is impacting employee turnover by gathering and analyzing data from employee exit interviews, online reviews, anonymous employee surveys, and/or by analyzing your historical salary data compared to salary data in the market. In this way, you can spot and repair troubling trends, such as salary compression and pay inequity.
4) Compensation decisions are not data-driven.
Reactive, gut-based decisions are expensive. When it comes to the decisions around budgeting for payroll, you should think about more than just headcount. You should also budget for annual pay raises, merit-based pay raises, spot-bonuses and other types of incentive pay to reward performance. You also want to be sure you are making these choices based on the most current salary market data available. Data-driven decisions save your organization money in the long run. This is one of the main reasons that organizations hire a compensation manager or expand a compensation team.
Your compensation manager will take the lead on compensation best practices research and data analysis. They will lead broad-based projects which may include budgeting for next year’s headcount, job reclassification, and retention analyses. They will also perform analyses and make recommendations on merit budgets and differentiation. It is their responsibility to conduct market analyses and determine changes to job architecture in response to market forces, such as rapid growth, a merger or acquisition, or pay equity analysis.
Additionally, your compensation manager will act as a liaison between HR and the hiring manager to help ensure everyone understands and trusts the salary market data upon which you are basing compensation decisions. This is especially critical in the recruiting process, during which all parties must be aligned on who they are looking for and what that individual is worth on the open market.
As compensation professionals, we must engage regularly with our internal customers (hiring managers and recruiting). It is important that all three of us are on the same page when it comes to the job. This means being on the same page about the skills, education and experiences required to be successful in the role. And perhaps most importantly, all parties need to have an agreement about where/who you are competing for this talent. When you are in agreement around the candidate profile and the competitive market in which you are hiring, the compensation professional can provide the most accurate recommendation.
-Brian Webber, Senior HR Business Partner and Administrator of compensation programs, PayScale.
5) Your pay communications are lacking, leading to low trust in HR.
If employee turnover is high and talented workers are leaving because of compensation practices, it’s time to examine not only your compensation strategy but also your pay communications strategy.
In PayScale’s Compensation Best Practices Report (CBPR), we found sixty-six percent of organizations agree that retention is a concern. Employee retention is the number one reason organizations adjust their compensation practices. A previous PayScale study also found that 82 percent of employees are satisfied with lower pay as long as the rationale for that pay is explained. That’s pay communication, in a nutshell. Pay communication is the organizational practice that determines how pay information is shared and communicated to current and prospective employees. For some companies, pay communication ends at what is written on the employee’s paycheck. For more mature organizations, managers are having ongoing conversations with their employees about what they are paid and why, the total rewards package provided to them, and how raises and promotions within the organization work.
Unfortunately, a majority of organizations don’t have any kind of pay communication strategy. Many organizations don’t trust managers to talk about pay with their employees, despite that most of them expect managers to do so. In addition, the majority of organizations don’t provide managers with any training on pay communications. The result is managers deciding what to do independently, creating an inconsistent experience for employees and a lack of trust in HR.
A compensation manager can improve this situation by evaluating your current pay communications and taking ownership to be more instructive and consistent about the organization’s pay philosophy, compensation strategy, and how to talk to employees about pay. Compensation managers can also answer specific questions that hiring managers have about how certain positions are paid and provide justification for pay ranges being what they are and why. Additionally, a compensation manager can help hiring managers review the internal salary history of high performing employees, discuss opportunities within the organization for growth, and go over total rewards packages, including all forms of indirect compensation.
If any of these scenarios sound familiar to you, you may need a compensation manager to help your organization make strategic, data-driven decisions around compensation and benefits. In today’s world, the smartest organizations continually look for ways to emerge as a sought-after workplace among a sea of competitors. A strategic approach to compensation could help you differentiate from the pack and build a solid pay brand.
Is it time to look for a compensation manager to add to your team? To help begin your search, be sure to check out the top ten skills to look for in a good compensation manager.