Compensation 101: The knowledge that really pays off

compensation 101

Philosophies, percentiles, and policies, oh my! Developing a solid compensation plan isn’t always as straightforward as it may seem. Whether your company is a small startup or a well-established business, a lesson in compensation 101 is always beneficial. Let’s take it back to basics and look at some of the essentials of compensation management and planning.

Developing a strategy and philosophy

The first step in creating a compensation plan is developing a strategy and philosophy. A compensation strategy is the overall plan that determines how you are going to pay your employees. It incorporates your company’s mission and core values to determine what fair and equitable compensation will look like for your organization. When developing a compensation strategy, consider the maturity level of your business and what is important to the people who work there.

A compensation philosophy is a statement that explains the reasoning behind your employee pay plan and ensures it aligns with your company values. It works alongside the strategy and helps support any business goals and initiatives. Creating a solid compensation philosophy can help create and maintain consistency within your organization, which all employers should strive for.

Determining where you want to be in the market

After developing a strategy and philosophy for your company, you will want to look at the job market for your industry. More specifically, you will need to identify your ideal market position. This can be determined by looking at the 50th percentile — or middle — of the job market and deciding if you want to meet, lead or lag. To meet the market simply means that you are meeting the average level of compensation for a particular position and paying that amount to your employees.

If you choose to lag the market, you’ll pay your employees less than the market average. Leading the market means you will pay employees more than the market average. There are various benefits and disadvantages to using each strategy, which will depend on how your organization functions. You might also consider mixing strategies across jobs within your organization. 

Different types of compensation

There are two main types of compensation: direct and indirect. Direct compensation is the payment given to employees based on time worked or milestones achieved. It includes base pay, incentive pay, differentials, cash achievement awards, and payment based on commission, overtime, and bonuses.

Indirect compensation is any other non-cash benefit, including paid time off, flexible benefit plans, deferred pay, insurance, student loan or tuition payment, and retirement contributions. Both forms of compensation are valuable to employees, but it is essential to communicate consistently to help everyone get the most out of their benefits.

Different ways to evaluate a job

Evaluating a job is necessary to determine your compensation for a specific role. When evaluating a certain position, you can do it through one of two systems: market-driven or job worth.

Market-driven systems assess a job by looking at its “going rate,” which can be done by analyzing quality salary surveys. Essentially, you are looking at how other companies within the market are paying people in similar positions to the job you are evaluating. 

Assessing a job through a job-worth system involves looking at one of four approaches: ranking, classification, point factors, and factor comparison. 

  • Ranking sorts positions based on a specific factor — such as education requirements — and creates a hierarchy of all jobs within a company. 
  • Classification is similar, but rather than making a comparison between jobs, it compares a role to a predetermined standard. 
  • The point factor method breaks down the different responsibilities of a position and assigns points to each. You can then use these points to determine the position to get the most pay. 
  • The factor comparison method takes similar jobs within the company and ranks responsibilities within them. They are then compared to a market standard to ensure an objective and consistent form of compensation. 

A compensation strategy can really “pay” off

Compensation can be complicated, but going back to the basics will help you and your company determine the best approach. Getting down to the nitty-gritty of compensation will ensure that your organization has a solid foundation for a compensation plan.

Need help with compensation basics? At Compensation Works, we work with all different types of industries to help them create the best possible hiring and compensation strategies. Contact us today for a free consultation.