Creating a Competitive Compensation Strategy

Over the past year organizations have met many challenges with talent. The first challenge, which began pre-COVID-19, has been finding enough qualified candidates to fill the seemingly never-ending pool of open positions. Once employees are hired, the next challenge is finding ways to make them stay. Every employer is searching for the coveted solution to retention.

In light of all this, compensation became the resounding focal point. Employees demand higher wages as they move from one opportunity to the next, sometimes increasing salaries significantly in the process. In an effort to fill positions and keep business flowing, employers not only met those demands, but also found new challenges in pay compression, internal equity, and pay gaps. Linda Jancaric, Compensation Director at MRA, has worked with many members to address these issues and find solutions. She shared some insight on creating a competitive compensation strategy that addresses all the key issues.

Q: If a company is struggling to be competitive with compensation, where should the focus lie?

A: The first thing is to deal with objective information. Consider market data, competitors’ posted wages, and feedback from exit interviews. The ratio of turndowns to offers can also be a strong indicator of how well your approach is aligned with the market.

Over the past year, companies were challenged to offer competitive wages, which often seemed to be a moving target. The competitive labor market may have led employers to offer candidates higher salaries than their existing employees. Companies need to consider the legal impact on the current workforce, especially for employees in the same or comparable job classification. Therefore, it is important to evaluate any negative consequences such as pay inequities or disparate impact, that may have resulted in this very dynamic market.

Of course, cost is always a factor. Senior management will need to know how proposed pay changes will impact the budget and overall product costs. If budgets don’t allow for significant changes in compensation, look for alternatives to enhance recruitment and retention outcomes. Consider the company’s mission and what employees value to determine what other incentives or benefits may be offered, such as paid time off, hiring or recognition bonuses, or flexible work schedules.

Q: Where can companies start if a compensation review has never been done or is overdue?

A: Start by looking at jobs and job descriptions to make sure they are still accurate. A lot has changed over the past few years and job duties have shifted. Make sure job descriptions accurately reflect what employees in those jobs are actually doing.

Ideally, you will review all jobs, but start with the most critical jobs and those that have changed significantly. If reviewing entire job groups, start with the entry-level position and work up from there.

Q: What are the main components of a well-structured compensation plan?

A: The most important pieces to include are:

• Solid job descriptions.
• Accurate market information.
• Salary ranges establishing the pay parameters for jobs.
• Compensation administration guidelines documenting the processes for granting salary increases and establishing new hire salaries.

Q: Not all companies have a formal compensation philosophy in place. How can you tell if one is needed?

A: All companies should have a compensation philosophy in place, at least to some extent. Even if there is not a lot of detail, having a guide can help a company make pay decisions based on how competitive they want to be in the market. This will also help to establish new employees’ salaries, and ensure equitable pay with long-term employees.

Q: What should companies watch for to ensure both internal and external equity are addressed?

A: Both are important for different reasons. When looking at internal equity, the most important factors are avoiding pay compression and disparate impact. Make sure pay decisions are fair and variations are supported with documentation.

One of the best tools to ensure external equity is salary surveys. Best practice is to use more than one survey source to ensure any outlying information is balanced and recognized. MRA releases several industry-specific, regional, and national surveys throughout the year and participating members have complimentary access to them.

Q: What are the main compliance issues companies may run into when making changes to a compensation plan?

A: One of the primary concerns should always be situations that indicate discrimination toward protected classes. Before implementing changes, thoroughly review the recommendations and be able to rationalize any outliers.

Another common issue is incorrectly designating positions as exempt. Just because a job has historically been considered exempt does not necessarily mean it meets the regulatory criteria. Accurate job descriptions can be a helpful tool to determine the correct exempt classification. Some states also have requirements that vary from the federal regulation, such as Wisconsin. It is important to understand federal and state regulations, because incorrectly classifying jobs can result in costly violations.

Q: Are there any current pay trends that could be pitfalls down the road?

A: One trend that emerged over the past year is issuing large increases to keep up with market demands but perhaps not laying the foundation for why. Employees should clearly understand if increases are based on market, performance, or other factors such as tenure or across the board increases. If an off-cycle market adjustment is given, clearly communicate this so employees do not have the expectation that it will be a common occurrence.

Another trend that developed is staggered increases. In an effort to catch up with the market, companies may have shifted from issuing pay increases annually to biannually or quarterly. This helped to respond to change in smaller increments, but may have also set the expectation for the pattern to continue.

As inflation rose, employees began asking for pay increases to match, referring to them as COLA adjustments. Compensation and inflation are two different concepts and the two do not typically rise or fall together. Providing educational resources, such as a financial advisor, to speak on ways to combat inflation may help alleviate the pressure felt from this misunderstanding.

Q: If companies wish to address transparency in their compensation strategy, what do you recommend including?

A: Information will vary based on the company’s philosophy, but studies show a direct correlation between communication and employee engagement. The more information a company provides about its compensation strategy, the more likely employees will feel they are paid fairly.

Some states have also implemented regulations for posting salary ranges for open positions. It is no longer taboo to discuss compensation and employees are able to freely discuss the topic.

Q: Do you have a recommendation for companies when reviewing their compensation strategy?

A: Make sure you have a clearly defined process, especially if you have never reviewed your strategy or if it has been a while. Understand the market so there is a purpose behind any changes you will make. This will also help you communicate the changes to employees.

For more information on creating the foundation for a sound compensation strategy, contact Linda Jancaric, Director of Compensation, at 763.253.9195 or [email protected].