Compensation is the biggest expense that employers typically have.  It’s what attracts employees and, what we believe, keeps employees.  It some cases it’s true and in some it’s not, however, what’s most important to employees is not necessarily how much they get paid but whether they believe they are compensated fairly for what they do.  The key to a strong foundation in compensation lies in 4 solid compensation practices:

 1.    Knowing how much you are willing to spend on total compensation

2.    Sharing compensation information with employees

3.    Advising employees when and for what reasons you will increase compensation levels

4.    Advising how much will be base pay and how much will be “re-earnable”

Before we get into details, stop and review these practices for just a minute.  If you were in your employees shoes, would you want to know this information?  I believe in all cases, especially with 2-4 the answer would be YES.  Compensation plays such an important role in our lives.  It determines our ability to meet our personal needs which is amongst the most important needs we have and it also determines the value we place on our own worth.  When we are able meet our financial obligations in our personal lives, we are more content.  When our effort at work matches what we are paid, ultimately it impacts how productive and loyal we are at work.

Knowing how much you are willing to spend on total compensation

You’ve worked hard to build your business and whether you want to share a lot of it or a little of it, establishing how much you want to share before the year begins is critical.  As you do your business planning, determine what percentage of operating budget (or the number most relevant in your business) you want or are willing to spend in total compensation (this includes base salary, bonus, benefits, perks, etc.) for your staff.  The number you choose should be a guide for you in future and should remain relatively constant with the increase in revenue.

While determining this number, you also need to be very aware of what the external market is paying.  You may have a number in mind from your perspective but if you can’t attract the people you want because your number is lower than the market, you may have to adjust the number to ensure it is realistic.

Sharing compensation information with employees

Many employers believe that it’s best not to tell employees anything about compensation.  I’ve seen this with large and small employers and in my many years of experience the only result this has is leaving questions in employees’ minds around fairness.  No good comes of this at all.  Think again of the 4 practices.  It’s a natural curiosity to know.  When this information is known, there is less room for gossip and more room for productivity.

Sharing compensation with your employees can be as simple as letting them know if you have a single rate for the job, whether you have a range you are willing to pay within and what they have to do to get to the top of the range or that compensation will be reviewed annually in a specific time frame and they will know if changes will be made in that time frame.  It can be much more structured than that of course but sharing as much as you can is important to your employees from a personal worth view and ability to meet their personal needs.

Advising employees when and for what reasons you will increase compensation levels

This goes hand in hand with sharing compensation with employees.  Typically, changes in compensation are given after year end results are in.  It will directly tie into the number you have chosen from your planning.  I’m a firm believer that compensation should be directly linked to performance management and how well each employee performs.

Many companies provide increases based on what they term “cost of living”.  This number can mean many things but traditionally is tied to the consumer price index or CPI.  We hear about this on the news on a monthly basis. If you use CPI as a guide for compensation increases, ensure you use the same measurement year over year consistently.  You can use a national, provincial or regional number but whichever you choose, remain consistent in your decisions and use the same month (ex. the April number each year).

When an employee does not perform to your expectations they should not receive any compensation increases, even if they are only CPI adjustments.  Many employers think they need to do this but not so.  Giving employees any increases (unless when there is an agreement otherwise) when they are not performing to expectation offers no incentive to improve and indicates to them that their performance is acceptable.

Advising how much will be base pay and how much will be variable pay

The previous practices are related to each other and this one is no exception. Base pay once given should never be taken away from employees (This past recession did see employees base pay  rolled back in order to meet operating expenses. However, this would be the one exception. Many employers gave guarantees to employees of when their salaries would return to pre-recession levels.)

Base pay remains one of the largest expenses employers have so it should be managed very carefully. Assuming employees are at the top of their range, adjusting base pay annually based on CPI and providing base salary increases to employees (who have met the job expectations) is a fiscally responsible choice for employers and fully supports you in managing base salary costs.  The message to employees is “we are adjusting your base pay according to the market changes.”  It is clear and consistent but it shouldn’t stop there.

Extra “one time” rewards should be provided for your “stars”, those employees who have achieved over and above.  It will be part of the overall compensation number you have determined at the outset.  This number can be given as bonus, incentive, or other financial reward that suits your industry.  In private sector, it could be bonus and in public sector where bonuses may not be suitable it could include education opportunities, extra benefits etc.

The benefit of doing this is twofold.  The first being that unlike base compensation that keeps compounding year over year, this does not. In banner years it could be more, in difficult years it will be less.  The second is that it will only be shared with exceptional performers, not all employees.  It sends a very clear message to employees about their value within the company.  The messaging to your “stars” MUST be different to keep them motivated and reaching further every year.

While base pay is a major attraction factor to companies, it is seen to be a “satisfier” not a “motivator”.  The bonus or one time payment is a motivator because it encourages employees to reach farther the following year.  Compensation is a key element of your total reward offering but never loose sight of the other elements as well.

♦      Benefits that an employer uses to complement the compensation an employee receives

♦      Work-life initiatives with a specific set of organizational practices, policies or programs that support employees achieve success in their professional and personal lives

♦      Performance and recognition in which performance is the alignment and assessment of individual and team efforts measured against the achievement of business goals, while recognition provides attention to employees actions, behaviours and/or results for meeting objectives

♦      Development and career opportunities comprise of learning experiences designed to enhance an employee’s skills and competencies which in turn support their career opportunities to support the evolution of the company and the employee’s career goals

Using all elements effectively provides you with a comprehensive “Total Rewards” approach to attracting and retaining the best talent!

Take care,