Every profession, every course, and every instruction manual starts with the basics. What is this topic all about? What are the objectives? What am I trying to accomplish? How do all of these “parts” or “steps” make sense when you put them together?
A handful of clients have recently asked how to develop a formal compensation structure and the questions are no different. For those of you who haven’t endured (yes, endured) a full course in Compensation 101, allow me to provide you with the basic steps in creating a formalized compensation program.
A handful of clients have recently asked how to develop a formal compensation structure and the questions are no different. For those of you who haven’t endured (yes, endured) a full course in Compensation 101, allow me to provide you with the basic steps in creating a formalized compensation program.
1) Understand the components of compensation
Direct Compensation
Indirect Compensation
Intangibles
Identify your competitive market
Who are you “competing” with to attract talent? Is it the entire metro area? Is it a specific industry? Is it based on revenue? For most positions, you compete with every other employer in your geographic area regardless of size or industry. Specific industries (aerospace, medical device, etc. may have different compensation structures than other industries), in which case an industry-based benchmark is appropriate. For executive positions, a revenue-based benchmark (budget-based for nonprofits) is typically the most relevant benchmark.
Identify who you want to be
Identify your desired market positioning.
Market leader: intentionally pay more than other organizations
At market: intentionally pay “about” what other organizations are paying
Below market: intentionally pay below market (perhaps an entry level position with high turnover, apprenticeship type situations, etc.)
Determine where you are today
Review your job descriptions (make sure they are current) and compare the job content to that in salary surveys. Once you find the best match, compare each incumbent’s pay rate to the market rate. You can choose to use either the weighted mean (weighted average) or median (middle) reported rate for the market value. This comparison is used to calculate a “compa ratio”. A compa ratio of 1.0 means the person is paid at the market rate. If a custodian is paid $12.00/hour and the market value is $13.00/hour the compa ratio is 92%
$12.00 /$ 13.00 = 0.923. The custodian is paid 92.3% of the job’s market value
Suggestions:
Avoid matching jobs based solely on title. Take the time to review the job content to ensure a good match.
Smaller organizations often have staff members that fulfill multiple roles. In this instance, it is acceptable to use multiple benchmarks and weight them based on how much of the job it represents. For example, an Office Manager may spend his time as follows: 30% office management, 50% bookkeeping, 20% IT administration.
The market value of the that position would be calculated as follows:
(office manager rate *.3) + (bookkeeper rate *.5) + (IT administrator rate *.2) = market value
5. Decide what to do with the results
Once you have identified your desired market positioning and determined each staff member’s compa ratio, you need to decide what adjustments, if any, should be made.
You may find that some staff members appear to be undercompensated based on their compa ratio and your desired market positioning. First, determine if the lower rate is justified, based on experience level or performance. If the lower rate is not justified, you may choose to make a “market adjustment” (a one-time wage adjustment to bring the person into the desired range) or gradually increase the person’s wages over time in line with the normal review cycle.
You may also find that some staff members appear to be overcompensated. First, determine if the higher rate is justified based on exceptional performance, a scarcity of skills in the marketplace, or deep organizational or industry expertise. If the rate is not justified, the most common practice is to “flat line” the employee, until the market value of the job approaches the rate the incumbent earns. Another common practice is to provide the staff member with a lump sum cash payment at review time, in lieu of increasing salary.
Organizations must also decide how to determine future increases. This is typically accomplished through a matrix which compares performance level to market value of the job to determine the percentage increase.
Finally, organizations must determine how transparent the compensation program will be to employees. Will you share market value of a job with an incumbent? This is generally preferable to an employee searching for their own answers on the internet. If you do share, it is important to be able to explain why a particular person is below, at or above market.
Compensation programs are often complicated, confusing or simply nonexistent. It is important to have a well thought through compensation program that is fair to employees, within the organization’s means, and understood by all. We hope this introduction to Compensation 101 helps you understand and evaluate your organization’s compensation program.
Direct Compensation
- Salary / wages
- Bonuses
- Commissions
Indirect Compensation
- PTO/ holiday pay
- Health and Welfare benefits
- Retirement benefits
- Learning and development investments
Intangibles
- Mission/ Vision / Values
- Company culture
- Flexibility
- Learning and development opportunities
Identify your competitive market
Who are you “competing” with to attract talent? Is it the entire metro area? Is it a specific industry? Is it based on revenue? For most positions, you compete with every other employer in your geographic area regardless of size or industry. Specific industries (aerospace, medical device, etc. may have different compensation structures than other industries), in which case an industry-based benchmark is appropriate. For executive positions, a revenue-based benchmark (budget-based for nonprofits) is typically the most relevant benchmark.
Identify who you want to be
Identify your desired market positioning.
Market leader: intentionally pay more than other organizations
At market: intentionally pay “about” what other organizations are paying
Below market: intentionally pay below market (perhaps an entry level position with high turnover, apprenticeship type situations, etc.)
Determine where you are today
Review your job descriptions (make sure they are current) and compare the job content to that in salary surveys. Once you find the best match, compare each incumbent’s pay rate to the market rate. You can choose to use either the weighted mean (weighted average) or median (middle) reported rate for the market value. This comparison is used to calculate a “compa ratio”. A compa ratio of 1.0 means the person is paid at the market rate. If a custodian is paid $12.00/hour and the market value is $13.00/hour the compa ratio is 92%
$12.00 /$ 13.00 = 0.923. The custodian is paid 92.3% of the job’s market value
Suggestions:
Avoid matching jobs based solely on title. Take the time to review the job content to ensure a good match.
Smaller organizations often have staff members that fulfill multiple roles. In this instance, it is acceptable to use multiple benchmarks and weight them based on how much of the job it represents. For example, an Office Manager may spend his time as follows: 30% office management, 50% bookkeeping, 20% IT administration.
The market value of the that position would be calculated as follows:
(office manager rate *.3) + (bookkeeper rate *.5) + (IT administrator rate *.2) = market value
5. Decide what to do with the results
Once you have identified your desired market positioning and determined each staff member’s compa ratio, you need to decide what adjustments, if any, should be made.
You may find that some staff members appear to be undercompensated based on their compa ratio and your desired market positioning. First, determine if the lower rate is justified, based on experience level or performance. If the lower rate is not justified, you may choose to make a “market adjustment” (a one-time wage adjustment to bring the person into the desired range) or gradually increase the person’s wages over time in line with the normal review cycle.
You may also find that some staff members appear to be overcompensated. First, determine if the higher rate is justified based on exceptional performance, a scarcity of skills in the marketplace, or deep organizational or industry expertise. If the rate is not justified, the most common practice is to “flat line” the employee, until the market value of the job approaches the rate the incumbent earns. Another common practice is to provide the staff member with a lump sum cash payment at review time, in lieu of increasing salary.
Organizations must also decide how to determine future increases. This is typically accomplished through a matrix which compares performance level to market value of the job to determine the percentage increase.
Finally, organizations must determine how transparent the compensation program will be to employees. Will you share market value of a job with an incumbent? This is generally preferable to an employee searching for their own answers on the internet. If you do share, it is important to be able to explain why a particular person is below, at or above market.
Compensation programs are often complicated, confusing or simply nonexistent. It is important to have a well thought through compensation program that is fair to employees, within the organization’s means, and understood by all. We hope this introduction to Compensation 101 helps you understand and evaluate your organization’s compensation program.