Do you know how to conduct a compensation analysis? In part one of our series on how to kick off a compensation project, we discussed how to know when it’s time to make adjustments to your organization’s compensation structure. We also offered strategies for getting management on board with a compensation strategy overhaul. So, now that the project has been approved and you’re ready to move forward, what should happen first?
In this article, we will go into the steps of a compensation project, including how to find the best market data, how to analyze that data, how to benchmark jobs and more.
The Five Biggest Compensation Mistakes
Before we get into the details of how to conduct a compensation analysis, we should discuss the most common mistakes we’ve seen when it comes to compensation. We already know that making these mistakes is costly, resulting in the need to spend more money on recruiting, putting important projects on hold, causing stellar employees to become burned out by overwork and the expense of having open positions sit vacant for a long time. So, what are the biggest mistakes and how can you avoid them?
1. Not updating compensation regularly
When your compensation strategy grows stagnant and begins collecting dust, you’ll see top performers leave for other jobs. You’ll also see more and more prospects turn down your job offers in favor of better offers from competitors.
Even when you are the sole person in charge of compensation, you can stay up-to-date on compensation trends. When in doubt, look to the data. Check out market data to see how organizations similar to yours are approaching compensation. We will discuss how to find and analyze data in a later section of this article.
2. Not empowering managers to fix problems
The managers in your organization have a lot of responsibilities on their shoulders. They are also typically the first to know when discontent is brewing among employees. Leadership often has the most impact on how employees feel, act and work. Your managers set the tone of the organization and morale typically starts with them.
It’s important to listen to managers and empower them to fix the problems they come across. And, when you are the sole HR leader in your organization, you can rely on them to help you take the temperature of the entire company. Listen to the problems they raise and work together to find solutions.
3. Not being transparent with pay decisions and/or rationale
How do you discuss pay decisions with employees? Are you discussing pay decisions with employees? This is an important part of your compensation strategy called pay communication. Simply put, pay communication is the organizational practice that determines how pay information is communicated and shared with current and prospective employees, including pay ranges, raise processes and total compensation packages.
There are two kinds of pay communication: reactive and proactive. A proactive pay communication strategy improves retention rates, increases employee engagement, enhances the perception of HR across the organization, boosts employee morale and reinforces company culture.
To learn more, see our infographic on reactive vs. proactive pay communications or check out this article for five tips to improve pay communications immediately.
4. Giving merit-based raises
Giving everyone the same percentage increase might seem like a quick and easy way to approach compensation. This might seem attractive when you are responsible for every HR function, not just comp, as it will save you time and allow you to see to your other duties. But we urge you to stop and think before you implement a three percent raise for every employee.
When you give across-the-board raises, you aren’t recognizing your top-performers, which might lead to poor morale and, worse, a loss of motivation for your best employees. Plus, you aren’t taking the opportunity to identify your lowest performers, which means you aren’t addressing the issues, like skills gaps. Additionally, blanket raises fail to take into account shifts in the market.
Instead of giving everyone a standard raise, taking the time to conduct a compensation audit can help keep your star employees motivated and performing at their very best.
5. Not having a structured, well-thought-out compensation plan
When your compensation strategy is cobbled together without much thought, you will eventually run into all the pitfalls we’ve already discussed. Your compensation budget will be wasted on the wrong employees, leaving nothing left for attracting top talent and establishing your organization as a top place to work among your competitors.
To avoid these mistakes, it’s time to put together a compensation strategy that is data-driven and forward-thinking. But how?
How to Conduct a Compensation Analysis
There are just a few simple steps to conducting a successful compensation analysis.
Step One: Set Goals
Why are you conducting a compensation analysis in the first place? Are you looking to be compliant legally or to identify pay inequities? Or perhaps you are trying to implement a compensation strategy that will set your organization apart as a best place to work in your field in order to attract and retain top talent.
Whatever the reason for your compensation analysis, be sure you and all key stakeholders are on the same page regarding the ultimate goals for the process. The purpose of your audit is what will drive the methodology and the decisions you make along the way. For example, the process to verify legal compliance is different from the process involved with addressing market compensation trends. When you are one of the only people in charge of driving this audit, be sure you are clear on the goals. You don’t want to waste valuable time on pieces that aren’t necessary for your purpose.
Step Two: Examine Your Organization’s Current Pay Practices and Pay Philosophy
How were current pay practices decided in your organization? Was the methodology sound or was it based on gut feel versus actual data? You must understand the components of current compensation in order to know what needs to be modified. For example, if your company is using outdated pay practices, such as archaic salary structures or performance without pay, you are likely to see low motivation among your top-performing employees. But, if your organization is currently taking the gender pay gap or the racial wage gap into account when making compensation choices, that is something you’ll want to ensure you continue to do.
To learn more, check out this article about the five compensation practices to retire.
Step Three: Gather the Data
As we’ve discussed before, gut-based pay practices are expensive. You want your compensation strategy to be data-driven. But, how do you know what data sources are right for your organization? And how can you be sure you’re using accurate data to create effective compensation benchmarks? Since there are a variety of compensation data sources available to you, it’s crucial to choose wisely. The two key things to consider when selecting your market data sources are: Are they current, accurate and validated? And do they cover the data needs of your jobs and organization, such as the breadth of your jobs, geographies and industries?
There are three common data sources:
- Crowd-Sourced Data: Crowd-sourced data comes from online surveys. PayScale administers the largest real-time salary survey in the world and we use a rigorous validation process to ensure you have access to accurate, valid data. By collecting data in real-time, we offer the most up-to-date data in the market to help you stay ahead of the curve.
- Company Sourced Data: This type of data helps ensure aggregated data is specific to your market (city and industry). PayScale Company Sourced Data leverages HRIS aggregated data to create an employer sourced dataset which can be used just like a traditional market survey. We blend a modern methodology with a traditional dataset by using smart algorithms and data science to improve mundane compensation tasks such as job matching and survey participation.
- Third-Party Market Data: Larger organizations tend to participate in these surveys by submitting data to a consulting firm, which then verifies that data and provides insights back to participants. Our survey management products support your choice of survey data. We also have a partnership with Mercer that can integrate market data from Mercer seamlessly with other data sources for more robust results.
To learn more about the different types of data sources, check out our whitepaper, “How to Perform Compensation Benchmarking and Set Salary Ranges.”
To learn more about third party Market Data, check out “Are you ready for market data survey participation season?”
Step Four: Put the Data into Action and Set Ranges
Pay ranges provide guidelines for how to apply market data to pay your employees. They also help smooth out daily or monthly market fluctuations and set upper and lower bounds of possible pay. The market value approximates the midpoint of the range. Typically, you’d bring entry level employees or anyone new to a specific job near the minimum of the range. As they grow their skills and develop their experience, they will hopefully demonstrate high performance and deliver results. As that happens, they would move through the midpoint of the range and toward the max end.
Next, decide whether you’ll use job-based or grade-based ranges. Job-based ranges provide a min, mid and max for a specific job. They are built around the market value for the job and focus on external equity. Grade-based ranges group jobs with a similar market price, level of responsibility and value to the organization together within a “grade.” In grade structures, jobs are slotted based first on the market value, then adjusted to account for internal alignment. Organizations with many-leveled roles would do better with a grade structure, but job ranges are useful to get a more accurate picture of salary ranges for a specific roles and may be what some job candidates expect for positions where this information is readily available.
To learn more about how to set ranges, check out our Comp 101 e-Book.
Step Five: Follow Through and Implement Changes
Compare employees’ pay against their salary ranges. Determine if you have any employees who fall below the minimum of the salary range or over the maximum of the salary range. We call these “green circle” (underpaid) and “red circle” (overpaid) employees respectively. If you do have this situation, it’s time to apply your policy for handling outliers. You may find that the amount it will take to resolve the outliers is more than you can do at one time. In this case, consider a multi-year plan to resolve the pay issues.
Finally, communicate! Update your executives with the status of pay at your organization. Bring your managers into the fold so they can help share compensation information with the employees they supervise. Give your employees high-level information about your compensation and talent goals. This brings us to the final step.
Step Six: Determine Your Pay Communication Strategy
Once you’ve completed your compensation benchmarking and have adjusted or set ranges for pay, it’s time to communicate with employees. Your pay communication strategy is how you communicate pay to all employees and prospects. Here are just a few tips about how to improve your pay communications:
- Don’t assume managers know how to discuss pay. You want to be sure you train all leaders in your organization around how to talk about pay. This will ultimately save you time in the long run, as managers will already know what to talk about and what questions they actually need to punt to HR.
- Be able to answer the most important questions about pay, which are as follows: what does a position get paid and how is pay determined? You need to know how to explain pay ranges and how employees can move forward on the pay range for their position.
To learn more about how to improve your pay communication strategy, check out this post.
Compensation analysis might seem like an overwhelming project to take on by yourself, especially if you are new to it, but we hope this guide has been helpful in breaking down the steps and giving you a place to begin. If you have other questions, reach out to us! PayScale offers professional services to our customers and have experts in compensation who can help you every step of the way.