How to Grow Part 2: Compensation Motivation

There are a wide variety of compensation plans in the corporate world, but if you’re a startup which one is the best option? When you’re looking to grow your team, it can be overwhelming deciding how to compensate your future employees while taking the compensation thresholds of your current employees into consideration. But know this: when employees understand how their achievements are valued and rewarded accordingly, motivation and engagement improve. Keep these things in mind when planning compensation for 2015. 

Good Job! Here’s Your Bonus

Typically a lump sum (year-end bonuses) are one tool that makes up total compensation. In fact, they made up 12.7% of payroll budgets last year. Year-end bonuses are more easily tailored to the specific job role compared to some other compensation rewards. While it’s easy for employers to lump the entirety of the bonus at one time - instead of a steady and consistent raise in base pay - how do employees feel about it?

Typically, employees are more receptive to the lump-sum bonus simply because the 1-3% raise doesn’t feel like much spread throughout the year. Bonuses tend to make employees feel more appreciated and subsequently, more engaged at work. When employees are recognized for good work - as positive reinforcement would dictate - they are more likely to continue that behavior. Consider a bonus for your employees if you are a lean startup and have year-end revenues or cash on hand. Remember that just like any compensation, your employees are required to report this on their taxes. 

Tweet This: Bonuses tend to make employees feel more appreciated and subsequently, more engaged at work. @Reviewsnap

Great Performance! We Just Don’t Have Much Cash…

Startups don’t always have the necessary funding to facilitate the typical year-end bonus or even an increase in pay throughout the year. Don’t worry, that doesn’t mean you can’t reward employees financially for their exceptional work. As a small organization, you can offer stock incentives as an alternative to a direct cash bonus. Now, there are different options for stock incentive plans. Nonqualified, restricted, and performance shares are just a few examples. 

At larger firms, stock incentives have become an increasingly popular means of motivation, albeit long-term compensation reward systems, for their employees. These organizations offer two types of stock rewards: 88% offer restricted stock and 64% offer stock options. Just because they are larger companies isn’t to say you can’t offer similar rewards for your small organization. You could translate that Wall Street stock into something more transparent for your company. Give employees room to gain emotional or professional “stock” in their work, their team, and their participation in the organization as a whole. Using ownership in the company (how you structure it) is a great way to keep senior level employees invested in the growth of the company and can be used as a recruiting tool when communicated properly.

Share on LinkedIn: Give employees room to gain emotional or professional “stock” in their work, their team, and their participation in the organization as a whole.

Outstanding Work! Keep it Up

Merit-based raises don’t have to be just money. That’s right… a raise doesn’t have to have a dollar symbol before it. Non-monetary benefits such as extra paid time off or even the coveted desk with a view of the skyline can instigate higher motivation depending upon the needs and wants of employees. While they don’t have to strictly consist of monetary rewards, organizations can offer a choice in a merit-based raise. If you have the financial wiggle room, give high-performing employees the option. Would you like X days extra PTO or X% raise for your outstanding work on last year’s project? Claire Bissot, former HR Consulting Manager at CBIZ Human Capital Services, said:

“HR people should be getting more creative in this area. We’re definitely seeing less extravagant rewards, and seeing more employees in non-executive and non-sales positions being recognized through reward programs with points, or with additional vacation days, for example.”

The use of incentive compensation is changing. Take a gander at the new scenery… what do you see? Stock options, vacation days, cash… Incentives like bonuses, stock incentives, and some non-traditional rewards all can be used as motivation. Whether you decide to use a year-end bonus system, a raise, or some extra vacation time, it’s important to recognize employee work with positive reinforcement if it is deserved.

While large organizations often have a traditional style incentive program, small businesses can participate in a reward system as well. Choosing the right compensation reward system for your organization can be an overwhelming endeavor. The implementation of that mechanism doesn’t have to be. Now start planning! 

Watch a demo of Reviewsnap's compensation dashboard modules to get started.

Don't Miss the First Part of Our Series:

How to Grow Part 1: Performance Management in 3... 2...

Reskilling and Upskilling Our Workforce Are Essential as Talent Gaps Expand

More than a third of the world’s employers are struggling to find the right talent.

ManpowerGroup’s 2013 Talent Shortage Survey canvassed more than 38,000 employers worldwide, and 35% of them reported “difficulty filling jobs due to lack of available talent.” What’s more, their struggle has been worsening; the 2013 findings were the highest proportion of employers expressing concern about talent shortages since 2007.

Surprisingly, this news comes at a time when talent pools are virtually brimming with people, and when a recent Harris Interactive study shows that 74% of workers would consider taking a new job immediately. With all of this talent available, what’s causing our shortages? The debate around this question has been lively. An aging workforce, unexpected and rapid growth in specific sectors, the sudden need for entirely new types of jobs (in the technology and data niches, for example), poor training and knowledge sharing practices, and even inadequate compensation have all been blamed.

Whatever the cause, we all know the results of unfilled talent gaps: reduced productivity and innovation, greater burdens on the workers we have, lower satisfaction and engagement levels, increased turnover … the list goes on.

The obvious question is … how are employers responding to these talent shortages?

“Nearly eight out of 10 employers surveyed tell us they are taking steps to grow the talent pool and ensure access to the right skills that will help drive business results,” the ManpowerGroup report states. “Yet more than one out of five employers report that they are currently doing nothing to remedy the skills gaps indicating that they may not understand how the talent shortage is putting their business at risk or they simply don’t know how to effectively solve the issue.”

Doing nothing clearly isn’t a viable long-term strategy for most employers but growing talent pools certainly makes sense. However, it’s not the only option we have. We can also reskill and upskill the workers we currently have. But to do so, our vision of these individuals must be crystal clear. We need to know precisely the talents and skills they possess and those they lack—especially those we need to grow and remain competitive. Once we have this clear vision, we must put it to use and implement training and development programs that fill our gaps, disseminating the right knowledge in the right ways. For today’s workforces, this means more mobile and social learning, more interactive and independent learning technologies, more mentoring and peer-to-peer learning, and the like.

We also have to take steps to better understand the specific work our people are most interested in doing, where their natural capabilities and skills lie, and the types of projects they want to work on in the future. Frequent and effective performance reviews are an ideal tool for gathering all of this critical information.

If we want to fill our talent gaps and build workforces capable of successfully carrying us into the future, expanding our talent pools is a terrific idea. But it can’t be our only one.

Compensation Reigns as the King of Job Satisfaction

According to a new SHRM research report, Job Satisfaction and Engagement: The Road to Economic Recovery, employees are citing pay as the top contributor to their overall job satisfaction.

The report flies in the face of a body of research that claims compensation isn’t a significant contributor to job satisfaction. SHRM says that 60 percent of surveyed employees rated compensation/pay as “very important,” while another 36 percent rated it “important.” Just two years

ago, compensation was ranked third among contributors to job satisfaction, eclipsed by job security and opportunities to use skills/abilities.

What’s behind the change? A SHRM representative chalked it up to the recession and the slow growth of incomes over the past several years.

Whatever the reason and whatever its rank, compensation is certainly an essential component of job satisfaction. When employees understand how their achievements are valued and rewarded, their motivation and engagement levels improve. This means it behooves us to continually reinforce their understanding and knowledge of our compensation programs. In fact, we should do more than simply educate employees about our compensation programs: we should take steps to make them active participants in these programs.

For example, employees should be responsible for entering and updating their personal information in our HR systems. Naturally, this would require a bit of training and a system that’s extremely user-friendly—but it’s a small price to pay for raising employee satisfaction, motivation and engagement levels.

The right HR information system/software also offers an array of benefits to our organizations:

·      They streamline the administrative tasks related to compensation management.

·      They improve legal compliance and minimize the risk of errors.

·      They diminish manager bias and improve fairness.

·      They help us collect and maintain more accurate people data, which leads to better decision making.

·      And they enhance our ability to share this data easily with functional heads and senior leaders.

Given the findings of the SHRM report, it’s probably a good time to revisit our compensation programs, practices and systems. It could pay big dividends.

Let’s Not Panic Over the Quit Rate. But Let’s Not Ignore It.

New data shows that workers are not afraid to leave their employers, even during economically challenging times like these.

The U.S. Labor Department recently reported that roughly 2.4 million American workers quit their jobs in November of 2013. More remarkably, the percentage of workers resigning from their jobs—known as the “quit rate”—is now higher than it was before the recession: America’s quit rate was 1.8% in November 2013 … up from 1.2% in September 2009.

Okay, there’s no need to push the panic button. A significant share of this spike in the quit rate came from low-wage jobs in the food services and retail industries. Even so, the quit rate should serve as a useful reminder to all of us about the importance of retaining our top talent. After all, they’re the most valuable workers we have. They’re also the ones who have the most employment options and, therefore, the easiest time walking out the door.

We now know that today’s employees are motivated to remain loyal to their employers through a complex mix of intrinsic and extrinsic factors. Intrinsic factors include how connected they are to their work, the sense of fulfillment and pride they get from their work, and the feeling that they are making a valuable and valued contribution to the organization, among others. Extrinsic factors include compensation, non-cash rewards, performance reviews, promotions and demotions, and the like.

Of course, savvy employers address all of these factors and the corporate world has given more and more attention to the intrinsic factors they once ignored. Many employers, for example, are building employee engagement levels by giving workers more mentoring, offering them exciting “stretch” assignments, and giving employees roles and responsibilities that are more closely aligned with their personal career objectives.

At the end of the day, retaining our top talent is all about rewarding and compensating them effectively. And that means much more than “paying” them appropriately. The most effective rewards strategies are total rewards strategies, which encompass compensation, benefits, learning and development, career advancement opportunities, and more.

If you’re interested in reading more about total rewards strategies that can help your organization retain its top performers, download a copy of our white paper, “Put Your Money Where the Motivation Is: Compensation Strategies to Retain Your Best People.”

The Pros and Cons of Tying Compensation to Performance Reviews

At Reviewsnap, we've seen firsthand the benefits delivered by a pay-for-performance structure that closely ties compensation to the performance review process. However, this isn't the right approach for every employer or every company culture.

 

Like most human capital challenges, tying compensation to performance reviews has its share of pros and cons. Here are a few of the most critical:

The Pros:

1.     It takes the “mystery” out of pay increases.—Employees often complain that raises and reviews are based on intangibles (how well their manager likes them, office politics, etc.) and not applied consistently. By tying reviews to compensation, performance clearly becomes the determining factor in compensation. The stronger the performance, the better the raise. But this approach demands that managers measure performance as accurately and objectively as possible, basing their reviews on concrete performance metrics and pre-communicated goals. If they don’t, it undermines the entire intent of pay for performance.

2.     It attracts top talent.—Research continues to show that top performers still cite pay as a main motivator. As Kerry Chou, Senior Practice Leader of Compensation at WorldatWork, noted during the company’s Total Rewards 2013 Conference and Exhibition, a recent WorldatWork survey revealed that better pay is the number one reason key people leave one employer for another.

3.     It can make administration easier.—With performance reviews tied directly to compensation, many employers find it improves the efficiency of integrating pay increase information into their payroll systems and generating follow-on reports. When compensation isn’t tied to the review process, HR or payroll staff members often have to take special steps to manually enter increases into the payroll system.

The Cons:

1.     Objective reviews aren’t easy to provide.—In order for pay for performance to work effectively, employees must be “rated” in some way but the rating must be objective and evenly applied. This simply doesn't work for all company cultures. For these companies, pay for performance can actually be counter-productive and introduce an air of unhealthy competition among employees who need to collaborate. In short, if the review process is perceived to be unfair, highly valued qualities such as trust, cooperation and teamwork can go right out the window.

2.     If the process isn’t clear, it can be confusing to employees.—Under pay for performance, a manager needs to be crystal clear in communicating precisely what is driving compensation. Is it goals, for example, or competencies? Let’s say a company's review process is based primarily on competencies but this isn’t clearly understood by an employee. She works hard all year to achieve specific performance goals and exceed targets. When she receives a lower-than-expected raise (because her communication with key team members has been consistently poor, for instance), it’s no wonder that she’ll go away disappointed, demotivated and confused. Bottom line, employees need to know how exactly they’ll be judged and what will drive their dollars.

3.     Compensation can overshadow the importance of reviews.—When a salary discussion comes on the heels of a performance review, it can be difficult for the employee to focus on the feedback he’s been given. Helpful critiques (both positive and negative) and guidance are eclipsed by the amount or lack of pay increase. Some employers overcome this by separating the review and the compensation discussion by several months. Others hold compensation discussions just once annually, while they hold several performance reviews throughout the year. If multiple performance reviews are held, employees must understand that compensation changes are based on the entire year’s worth of reviews—not just the most recent one.

At the end of the day, each employer must decide the compensation and performance review strategies that best fit its culture. Whatever your final choices are, remember they’ll form bedrock of how your employees feel about working for you—and how dedicated they’ll be to giving you their best efforts day after day.

Communicate your strategies and expectations clearly. Give your people well-defined guidelines. And empower your managers to reward top performers appropriately. These are the keys to compensation and performance success.

Taking a ‘Lean In’ View of Compensation for Women

In her book Lean In: Women, Work, and the Will to Lead, Facebook COO Sheryl Sandberg makes a strong case for how women miss opportunities for advancement when they “lean out” — when they fail to take advantage of opportunities early on in their careers.

It’s a perspective that bears serious consideration by anyone responsible for compensation
management.

The argument is especially intriguing for those involved in compensation management in light of recent studies that do in fact conclude that most of the male-female pay gap results from the career decisions women make rather than compensation policies.

Common wisdom and current federal reports put the pay gap between the sexes at 18 to 23 cents per dollar (women, on average, earn between 77 and 82 cents for every dollar a man earns doing the same job). However, as reported in an extensive and well-researched article in the March issue of Time magazine, an estimated two-thirds of the supposed pay gap can be attributed “not to institutional discrimination, but to choices that women make.” This report and others like it bolster Sandberg’s argument.

So, what can compensation management do if the choices women make are more important in closing the pay gap than company policies are? Here are six points to consider:

1. Understand the huge role that compensation management and performance-development strategies can play in creating and promoting career choices throughout your organization.

2. Be sure your pay grades are accurately tied to straightforward, up-to-date job descriptions or salary ranges, and that they’re completely gender-neutral.

3. Actively differentiate your high performers from your high-potential employees and provide the right development strategies for each group throughout your enterprise.

4. Employ 360 degree feedback that truly captures a full and accurate view of each employee’s performance and reviewers, and that gives insight into possibilities for career development.

 5. Be sure you link compensation with performance across the board to motivate and reward the most successful behaviors.

 6. Integrate your learning programs into your development plans — and tie them to compensation incentives and rewards — to be gender-inclusive as you reduce the chance of skills gaps and knowledge drain.

If you want to continue to develop and retain all of your best employees, it’s crucial that you combine the hard-core data and statistics of compensation management with the attitudes and beliefs that drive the choices women make about their careers.

Compensation Audit: Checking Where You’re At

Over the course of a few years, things can dramatically change for employees. They could be in new positions, new departments can be created, and other functions of the business might change or

even be removed.

Does your compensation system reflect those changes?

Information is critical to a company’s success, especially when leaders rely on that information to make decisions. As we see a push to more data-driven decision-making, companies need to perform more audits to ensure that their systems have clean data. Just a few errors could cost millions of dollars.

Whether titles no longer relate to the work employees do or salaries need some calibration, it’s time to take stock of where your company is at with its compensation information.  

First, get employee information up-to-date. Having a SaaS system for employee information is a great way to make sure employees keep their information up-to-date. This can be through your HRIS or an employee portal. Send a reminder to employees to update their information, with managers checking titles and workgroup information of their employees.

Second, check salaries. Even if all of your salaries aren’t eligible for calibration against market rates, you can start with key positions. You then need to make a plan to calibrate all other positions, whether by department, type, or location. Ideally, you perform this as new positions are created, as new employees are hired, and when it’s time for annual rewards.

Third, run reports when you can. Many systems have standard reports, but make sure you’re identifying the information you really need to make good decisions. For example, you might want to compare performance data against compensation information, so that would require further analytics. These reports, though, help give context to compensation information in your company. Context helps you know why something might be happening or what other factors could be modified to get the desired results.

Get into the habit of conducting these audits early so your information is clean and ready to be used to make decisions. You’ll better inform your executives and help them understand what it takes to plan for the future.

You Have To Compensate Employees

You’re probably familiar with the dreaded announcement: No raises this year — again. Announcing that a pay freeze is continuing is messy business. Employees hate to hear it, and managers hate to be the bearer of bad news.

There can be a host of reasons why there isn’t enough money to reward people for their performance. When it comes down to a choice between paying the light bill and giving a bonus, the light bill wins every time.

But if you’re moving into a fourth year of pay freezes, it’s time to find a way to compensate employees for what they’ve done. Compensation isn’t everything, but if basic financial needs aren’t being met, employees can’t give you top performance. Compensation is a type of reward, and rewards show that the company recognizes the difference between great performance and poor performance.

If you’re treating everyone like poor performers by failing to reward them, don’t be surprised when that’s the kind of behavior you get.

Instead, think about how you can make small compensation changes that have a big impact. Try looking at your compensation plan with these ideas in mind:

·       Shake up the budget: Where can you shift some money around? Giving a 5 percent raise to everyone might not be possible, but finding a few dollars for bonuses could help keep your hard workers engaged. This is where you really have to match performance and rewards, because you’ll only have budget for the top performers.  

·       Get consistent: Are you offering new hires competitive salaries while current employees’ pay lags behind? You may not have the budget to bring everyone up to market rates, but make sure there aren’t major discrepancies among similar roles. Help hiring managers understand compensation options and find ways to match internal salaries to preferred rates.

·       Find variety: If you think about compensation as a reward, there are suddenly more options. You can provide managers with flexible funds that can be used for spot rewards — like sending an employee to a conference or taking the team to a congratulatory lunch. Non-cash rewards can’t replace raises, but they can help your people feel appreciated throughout the year.

Just because an employee hasn’t left yet doesn’t mean their loyalty should allow you to hold back on compensation. Budgets are tight, but you should find a way to grant rewards to employees who deserve them. Hopefully, you’ll then drive improved performance, which might result in better opportunities to raise compensation in the future.

Compensate Differently: Use Employee Engagement Tactics

Money is a tricky motivator for employees. Based on an infographic from Bolt Insurance, 22 percent of employees leave their jobs because of pay/benefits issues. But the biggest reasons have more to do with non-monetary factors:

·       Heavy workload — 43 percent

·       Lack of opportunities for growth and advancement — 43 percent

·       Unrealistic job expectations — 40 percent

Yes, people want raises (especially if you’ve been in a salary freeze for three years), but more money won’t always keep people if the job or environment is awful.  

Compensation doesn’t have to be only about the money. Instead, expand your definition to include rewards and engagement. A few dollars can go a long way if you apply them effectively. Let’s break it down based on these other turnover factors:

·       Heavy workload: People wear more hats than ever in their jobs, and at some point they’ll burn out. See where people are working under, at and over capacity. If the workload on a team isn’t distributed properly, redistribute. Then continuously check with your employees, celebrating big wins. If someone’s going above and beyond, say “thank you” with a long weekend.

·       Lack of opportunities for growth and advancement: Have you told your employees about all their career options? Create an internal site for job postings and positions. Make it easy for people to get information and apply. Then take it a step further and provide internal networking opportunities. These could be in-person happy hours if everyone is local, or virtual brown bag discussions for the remote. You're helping people to get to know one another and then to see what else is going on in your company.

·       Unrealistic job expectations: This is something you can catch early when recruiting candidates. Are they being hired for the job they interviewed for? Set the right expectations upfront and keep them. Help managers have regular discussions with employees to make sure everyone’s on the same page. If there’s a major discrepancy, encourage employees to come up with solutions to make their job more inline with their expectations.

Compensation is only one part of the equation, so think about the reasons your employees might be frustrated or leaving. Find alternate rewards and ways to encourage engagement before employees become dissatisfied. You’ll be using budget more efficiently and seeing greater productivity from your teams.

Take the Drama Out of Compensation — Strategies for Honest Communication with Employees About Pay

Negotiation strategies indicate that when both sides work together to share information, both parties come out better. When you hide information or believe the other party is hiding something, both sides come out with worse deals than if they had been honest. Yet, it’s in our nature to think we’re leaving something on the table.

 

Then again, just bothering to ask for a raise can get you nowhere (or a knee in the groin). “The Secret Life of an HR Lady”  shows just how painful that compensation conversation can be.

 

Compensation drama makes things more tumultuous in a company culture because people think they’re missing out. Or that decisions aren’t being made fairly. A lot of worry and gossip stems from people trying to fill in the blanks themselves. There will always be people who make compensation discussions dramatic, but you can reduce anxiety by being upfront.

 

Here’s how to communicate honestly with employees about pay:

·      Be upfront when there isn’t money. Employees get more frustrated when you hide the reality of your business than if you had let them know things were tight. It’s tough to hear that the business is going well but that people will have a fourth year of no raises. It’s a mixed message. Is the extra money going to pay off debt? To invest in a different rewards system? Employees can be on your side if you’re not hiding information.

·      Measure performance so you have data to support compensation decisions. If your company is truly implementing pay-for-performance, you are no longer distributing rewards evenly (aka the peanut butter approach). When someone doesn’t get a bonus or raise, you'll have the information to support the decision. You'll also need a plan for developmental steps so that performance can be improved. And if you want to reward a top performer, you'll have the documented justification to request the spend.

·      Deliver on your promises. When you have contracts or agreements that call for bonuses, commissions or raises, you're obligated to deliver. You can add language around performance deliverables or goals, but if you renege on the agreement, employees will find out. They’ll wonder what else you’ll renege on. There might be good reasons for having to back out, but be prepared to have a conversation about why you can’t deliver and about a plan to revisit the obligations in the future.

Employees will gossip; that’s why they call it water-cooler talk. You can still control messages but also share information. Your behavior influences how employees perceive your honesty. Don’t let compensation drama impact your company’s productivity and culture. Strive for transparency, document your decisions, and deliver on your promises.

Forget Policies and Paperwork — the 5 Things Business Leaders Really Want From HR

Read beyond the headlines of any leading Human Resources or C-suite trade journal, and you’ll understand why talent has replaced technology to become the game changer for edging out competition in the 21st century. Despite the dialogue and debates covering this trend, one lingering question continues to raise the hackles of both business leaders and Human Resources practitioners — who takes primary ownership for acquiring and developing the arsenal of talent within the organization?    

It’s a classic chicken-and-egg story. Line managers can create the greatest positive impact on employee engagement and performance, but only if they are provided with the right tools and support to effectively lead their teams.  

The most successful HR professionals are moving beyond paperwork and policies and stepping forward into more strategic roles to deliver what business leaders need most today:

1.      Bold Innovator. It’s considered “table stakes” for HR to have the fundamentals of core services like benefits administration, compensation and compliance nailed down. While these processes are necessary to any business, they do little to support breakthrough performance or results. To deliver more value, the human resources function needs to spend more time accelerating operational improvement.[1] Forget turf-protecting activities that quash outside-the-box workforce management ideas; instead, HR should work closely with business leaders to help incubate pilot programs that have the potential to improve products, services or results.

2.      Talent Consultant. Outperforming today requires that managers have greater insight into every aspect of the business, including their people. Human Resources can deliver tremendous value by providing best practices in performance management, acting as the gatekeeper of cultural development trends, and providing relevant analytics and quantitative data to help managers gain efficiency and make better decisions.

3.      Trusted Adviser. Managing a team of people is challenging, even for seasoned leaders. When dealing with unique personalities, performance and work preferences, managers often feel they need to be all things to all people. What they really need is an objective consultant who can support their development to be the best leader possible. HR business partners earn respect as trusted leadership advisers when they provide constructive guidance that’s candid, honest and substantive. By asking for and responding to feedback in return, the HR practitioner also models and reinforces effective coaching techniques for the business leader.  

4.      Credible Expert. Backing up their deep and broad functional expertise, HR professionals must also have good business acumen and a sound understanding of their organization’s vision. With this blend of knowledge and experience, Human Resources can forge the critical link between the strategy of the business and the identification and development of talent to meet those needs. But earning a reputation as a credible expert among the management team doesn’t come easy. It requires HR partners to demonstrate:

·        Leadership courage under pressure

·        Unwavering conviction to champion employees

·        A sense of urgency in their actions

·        Commitment to achieving results

5.      Solution Strategist. More than anything, managers value HR partners who can help them achieve success for their teams. When involved in operational meetings or strategy sessions, they want HR to present relevant, straightforward and streamlined solutions, not risk-avoidance barriers or complicated science projects. HR professionals can lead through complexities by clarifying situations, distilling scenarios down to their root cause, and focusing on innovative outcomes that benefit both the business and its employees.

What do business leaders want from HR? Control over the tactical administration that comes with the role, yes. But there’s also a seat at the proverbial executive table for Human Resources professionals who embrace their strategic role as business leaders rather than policy practitioners.

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[1] Power, Brad. Focus HR on Process Improvement. Harvard Business Review. February 2012.

The Business Impact of Compensation Management

Imagine continuing to manage your personal investment portfolio with equal contributions spread across each account, regardless of its past performance or future potential. If a low-involvement, low rate of return approach fits your investment style, you might just be happy with the resulting meager financial gains.

Most of us expect our money to perform better on our behalf. We diversify our portfolio, search for investments that are trending positively, then monitor our distributions and make course corrections that, over time, reinforce our investment strategy. Those same best practices in money management can also be applied to an organization’s strategy for compensation management.

Compensation in terms of salaries and wages is often the single biggest cost to an employer and, depending on the industry, can be up to 70 percent of a company’s annual operating costs.[1] Yet many companies put this critical investment on autopilot by implementing across-the-board pay increases without taking individual performance into consideration.

With so many organizations focused on controlling costs, getting the most out of compensation budgets means developing a strategy for wise investments in talent. Effective compensation management starts by identifying a pay philosophy and strategy, then evaluating the plan on a regular basis to remain in balance with external market rates.

Once a compensation plan is in place, salary increase budgets can then be allocated to reward individuals for their performance against goals that drive the business, creating a true “pay for performance” culture. But it’s not just high-performing employees who benefit from effective compensation management; the company feels the positive impact from:

·       Higher productivity. When high-performing employees understand the connection between their individual contributions and their pay potential, motivation is created to deliver above-average results.

·       Budget effectiveness. By differentiating salary increases based on individual performance, companies can ensure that their merit budgets generate the greatest ROI.

·       Improved retention. When your strongest players realize that their performance is not only noticed but also fairly rewarded, they’re more likely to be satisfied and will continue to contribute for longer periods of time.

Perhaps some people are comfortable taking a “low involvement, low rate of return” approach to their personal investments. While that may be fine on a personal level, that strategy doesn’t hold up well for business. Invest the time to develop your compensation strategy, then invest in an automated compensation management software solution to ensure that your compensation program delivers a solid, long-term performance.

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[1] Harris, Stacey and Jones, Katherine. Getting Compensation Right: The Value of Compensation Analysis and Planning Tools. Bersin & Associates. April 2011.