Five Tips for a More Effective Compensation Review Process

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By Vincent Chow and Peter Saulnier, CPHR

It’s that time of year again, and it’s one that many HR practitioners dread—time to start thinking about conducting a compensation review for their organization. Occasionally organizations simply run out of time to review their compensation programs properly. Like exercise, we all know the importance of making time to review our compensation programs and employee compensation, but, simply put, procrastination is easy. Before long, it’s cold enough to bring out the winter coat, the opportunity has passed and another year has come and gone.

On the other hand, there are those organizations which DO have annual reviews, but only focus on one aspect of the entire process be it updating salary ranges or employee salary increases. Without fully understanding the connections of each element within the process or strategically aligning them to maximize the full potential of compensation programs, many organizations fail to realize the importance, or potential value, of what is essentially one of an organization’s biggest spends.

In that spirit, let’s have a new “Autumn HRevolution” and do this year’s compensation review properly.  As Einstein said, “If you do what you always did, you will get what you always got.”

So, what will you do differently this time?

What follow are five ideas for you to consider incorporating into your compensation review process this season to make it more effective – and maybe, just maybe, even a bit more enjoyable for you.

#1: (Really) Get to Know your Compensation Philosophy
Many organizations have either a generic compensation philosophy, which does not tell the real story, or one which exists only in the CEO’s head. Before you rush to review the market data or play with a spreadsheet, a good way to start the compensation review process is to take a look at your compensation philosophy and make sure it is still valid and clear.

Has your organization defined its market comparison group when it comes to designing compensation programs? Often the comparison group was set several years ago when the organization was in a different stage—and nobody seems to remember how or why it was set. This is a great chance to review and re-align your comparison group with your growth strategy or business plans.

How do you target your salary structure within this market comparison group? That is to ask, where do you “anchor” your salary range midpoint (or control point) within the market data from the comparison group?

The most common approach is to set the salary range midpoint at the market median—and design the higher and lower ends to allow the organization’s salary ranges to capture the full spectrum of the market data. However, sometimes organizations may (and should, some may argue) choose different strategies; for example, one organization may have a great reason to pay its employees “up to” market median for a more conservative salary strategy if they are more competitive on other elements of total rewards; another organization may choose to set their salary range midpoints much higher than market median to support its rapid expansion and aggressive hiring plan.

Even if there is no formal compensation philosophy in the organization, one should still try to get it out of stakeholders’ heads as much as one can. It is crucial to know the strategic intent of the organization in terms of its compensation programs and processes. Without it, it is like doing a home renovation without knowing the owners’ design tastes—or budget.

#2: Don’t Skip the Organizational Structure Review
Many common issues about “overpaid” or “underpaid” positions (or incumbents) may be rooted at the job design level. If you notice a job that is significantly over- or under-paid compared to the market, chances are the job is not designed at the right level—or that the job is not benchmarked at the right level for market comparisons.

When comparing jobs to market, one should be cautious about the word “senior” in many titles. It could be a truly advanced level in an organization’s internal structure – or simply a nice title for a job that is the same as those without the “senior” in their titles.

A similar principle applies to executive positions. Organizations have different approaches to applying “vice-president” or C-suite titles to their senior leaders. It is important to understand the structural design of your organization and how it compares to the job designs in the surveys so that your compensation analysis is built on a solid foundation.

#3: Check your Market Data Survey(s)
The right salary survey provides organizations with reliable and timely market intelligence on pay programs without breaching confidentiality. While one may get market data from a “free” survey or anecdotally from a “friend,” only a reputable salary survey allows a consistent and systematic approach to establishing a fair and trustworthy compensation program. From time-to-time, organizations should review the salary surveys they are using against their up-to-date compensation philosophy.

How do you know if you picked the right salary survey? The participant list is probably the most important consideration. The whole point of salary surveys is to compare your organization’s pay practices with an appropriate comparison group.  Check if the participant organizations align with your organization’s compensation philosophy.

If there is an industry survey fitted to your industry or a general industry survey that meets your needs, then there no need to reinvent the wheel; just choose the most appropriate one and participate. If not, conducting a customized salary survey allows you to design a survey specifically for your needs, and those of the participants.

#4: Give Your Salary Ranges New Meaning
After you have done the hard work of analyzing the market data and determining new salary ranges for the coming year, you need to ensure that the organization has a consistent approach to using the ranges.

If a salary range midpoint for a job is $50,000, does it mean that most employees in that job are expected to be paid at $50,000—or only fully contributing employees? For that matter, what does the “fully contributing” mean in your organization? Do the top performers get to be paid more? If so, what is the appropriate differentiation? These may seem like a lot of questions, but ,without a clear answer, managers and employees arrive at their own conclusions as to what these ranges mean.

When you share a salary range with a manager, make sure that you have guidelines or supporting documentation for your managers to help them understand. This requires more than just the figures of the ranges, but also involves the meaning of the ranges – and how employees are supposed to progress their salaries through these ranges.

#5: Run Management Sessions to Practice Compensation Communication
Are you still sending an extra long “communication” email to all managers to inform them of all the things they are supposed to say to employees for the compensation review? We all know what happens to these emails and guidelines; some managers will stick to it, but the majority just dive into the compensation communications with employees without much preparation.

If something is worth doing, it is worth doing well. There is no doubt that employee communication is the most impactful part of the compensation process. In keeping with this understanding, why not hold a management session to take them through the process? Even more effectively, consider adding a workshop for managers to practice communicating to employees.  Another idea is to invite senior leaders to share their experiences and coaching advice with other managers. ??Compensation communication can be a stressful conversation for employees, and for managers too. Having a chance to practice in a safe environment helps managers tremendously for when they have these conversations in real work situations.

Admittedly, while the compensation review process is not rocket science, there are times when it may feel like it.  Hopefully by incorporating these best practice tips, you will have a much more enjoyable and effective compensation review process this season.

Peter Saulnier, CPHR and Vincent Chow are Vancouver-based partners at Logan HR, a full-service outplacement, compensation and talent management firm and member of VF Career Management.

(PeopleTalk Fall 2016)

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