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Why Should You Conduct a Compensation Audit?

Why Should You Conduct a Compensation Audit?

As an HR or Compensation Leader, are you confident that your organization is paying employees fairly for their work? Are you sure your company is complying with labor laws and regulations? Are your compensation offerings competitive to attract, motivate and retain talent? If you have any uncertainties to these questions, then a compensation audit should be performed which will serve several crucial purposes.

Objectives

  1. Equity and Fairness: Firstly, a compensation audit ensures that pay practices are fair and equitable. By examining how employees are compensated, companies can identify any discrepancies or inequalities among individuals performing similar work.
  2. Attracting Talent: Competitive compensation is a powerful tool for attracting top talent. When companies conduct audits, they can adjust their compensation strategies to align with industry standards and attract skilled professionals.
  3. Reducing Turnover: Fair pay contributes to employee retention. When employees feel valued and adequately compensated, they are less likely to seek opportunities elsewhere. A compensation audit helps address any discrepancies that might lead to turnover.
  4. Enhancing Productivity: Properly compensated employees tend to be more engaged and productive. Additionally, by evaluating compensation practices, companies can optimize pay structures to motivate and retain high-performing staff.
  5. Legal Compliance: Ensuring compliance with labor laws and regulations is crucial. A compensation audit helps identify any potential legal risks related to pay practices, allowing companies to address them proactively.
  6. Strategic Alignment: Compensation is not just about numbers; it reflects a company’s values and priorities. An audit ensures that compensation aligns with the organization’s overall strategy and culture.

Get Started!

Remember, fair and transparent compensation is not only a business necessity but also a reflection of an organization’s commitment to its employees and their well-being. Contact Alliance Compensation today to learn more about conducting a compensation audit for your organization.


Nancy Ellington is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the US in public and private companies. She has over 30 years of experience in corporate leadership roles and consulting, and lives with her husband and two kids in Redmond, WA.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services related to this topic are Market Analysis, Salary Structures, Job Architecture, Pay Equity and Employee Pay Planning Tools.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

Image by rawpixel.com on Freepik

As an HR or Compensation Leader, are you confident that your organization is paying employees fairly for their work? Are you sure your company is complying with labor laws and regulations? Are your compensation offerings competitive to attract, motivate and retain talent? If you have any uncertainties to these questions, then a compensation audit should […]

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Pay Satisfaction

Pay Satisfaction

Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of their manager.  How can this gap ever be closed?

Managers live with changes and constraints in their jobs every day. Knowing the key drivers of pay effectiveness and satisfaction are important. The perceptions of employees around equity and fairness may provide an altogether different understanding. Employees perceive what is “fair” and the manager has a rather critical role in achieving that result.

Equity not Equality

There is a perception amongst some experienced managers that what employees want is equality in their pay – to receive at least the same base pay increase, bonus, stock, etc. as another, whether inside the company or at another company. One part of that perception is correct, that employees make comparisons between their situation and those of other comparable employees both inside and outside the company. But those comparisons are usually not made to achieve equality; they are made to achieve equity.

Equality would require all things to be equal (same amount). Equity makes a comparison of the inputs and outputs such as performance inputs (employee vs. others) and outputs (the manager’s decision on the rewards amount). As a result, the employee may be very satisfied with their level of inputs and the resulting rewards decision.

Finding the Balance

On the other hand, if there are imbalances in the equity equation that aren’t remedied to the employee’s satisfaction, they may try to re-balance them on their own. For example, if they were to reduce their inputs (commitment, dedication, effort, loyalty, etc.) they may be more satisfied with the lower end of the manager’s rewards decision. In another scenario, the employee may have a whole different idea of what is relevant to the manager’s pay decision, or the manager may have a different perception of what is a relevant reward. Overall, without some constant and ongoing communications between manager and employee, the pay equity scale may never be in balance.

Pay Satisfaction Drivers

The Compensation Roundtable of the Corporate Executive Board (now Gartner) has conducted extensive research on perceptions of employees as to satisfaction with how they are paid. It resulted in two primary discoveries with quantitative results that thus drive employee performance (their discretionary efforts) and retention (intent to stay). Both of these satisfaction drivers are able to be influenced by a manager because they are based on the employee’s perceptions, and those perceptions are formed from the manager’s action or lack of action on how they set, communicate and evaluate performance targets as well as communicate the company’s intent and strategy for pay programs that the manager administers. The two drivers are:

Pay process fairnessEmployees who believe that pay processes are fair are half as likely
to leave a company as those who believe that they are not.
Pay distribution fairnessEmployees who believe that pay distribution is fair are likely to give
half again as much effo1t as those who believe that they are not.
The perception of fairness in pay processes and distribution are both able to be influenced by a manager.

Process and Distribution Fairness

(First off, let me just say here that I’ve never been a fan of using the word “fair” to describe pay. “Fair” is a large public event that happens every summer in US counties, with rides, games, and agricultural exhibits.) But back to a more serious tone…

Process

Perceptions of process fairness are driven from organizational design of systems and processes, and manager decision-making:

  • The perceived understanding of the performance and pay system (organization, performance targets, communication)
  • The perception that the system in which performance and pay decisions are made is fair (organization, equitable achievable targets, communication)
  • The perception that performance ratings and pay are determined in a fair manner (manager)
  • The perceived understanding of how individual performance and pay decisions are made (manager)

Distribution

Pay distribution fairness is linked to two familiar levers for pay systems, internal equity and external competitiveness. In order to improve perceptions of fairness, employees need to believe that their pay is fair compared to others within their organization and that their pay is fair compared to others in comparable organizations. You should have a regular list of comparator companies with which to compare your external pay practices.

Within the distribution satisfier, the decisions your managers make on pay and rewards are typically done within the context of tools and budgets that are provided. Some of the common tools include:

  • competitive pay ranges (to allow differentiation of pay for higher performers and to be able to pay competitively to the external market);
  • a merit matrix (to allow managers to distribute funds in base pay increases based on competitiveness and performance);
  • if you have incentive plans, any sort of individual factor or element that managers control that provides greater payouts for top performers.

Other elements of decisions that managers make around rewards for employees may recognize especially significant achievements. Cash examples: (cash or other recognition program). Noncash: days off, key project assignment, visibility/ exposure, or others. Remember though that perception of what the reward is may be different than how the employee feels or perceives it.

Communicating

Finally, communicating pay is not just an annual event. Managers should discuss their performance expectations with employees. Employees should know how targets are determined. And similarly, managers should share their decision process, and current and future compensation growth potential.


Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services related to this topic are Market Analysis, Salary Structures, Job Architecture, Pay Equity and Employee Pay Planning Tools.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

Picture attributed to wirestock

Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of […]

Read More
 

I Could Tell You, But Then I’d Have To…

I Could Tell You, But Then I’d Have To…

I have enjoyed teaching a couple of compensation certification classes for WorldatWork, the association for total rewards professionals. I would get a lot of questions about a lot of topics, but one that frequently surfaced – whether in a module or not – is “this is great, but would you tell your employees that?” Yes, compensation transparency. And this isn’t some super-secret recipe for the incentive plan funding that makes you an insider, this is some of the compensation basics like pay grade, pay range, that sort of thing.

Sharing for Success

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly. The best thought-out programs with the most strategic elements and execution can still fail when not properly communicated. As a matter of fact, I’d say the two things that most often are an anchor around the neck of an otherwise successful program are the lack of management training (related topic, different time) and the lack of effective communication.

Think of it another way. What if for one of the biggest investments most people ever make (like your house) all you were told was, “it has a total of 11 rooms. Sorry, I can’t be more specific.” Is that enough information for you to be all-in as a buyer? Should the seller, who really wants to unload the house reasonably expect to sell it?

Top 5 List

Compensation is a huge investment your company makes, and if you are keeping secrets you probably aren’t getting the most from your money. Here are my Top 5 reasons you should communicate as much as possible about your compensation programs:

  1. Employees will make up the part they don’t know.
  2. Missing information is a constant negative and anxiety producing reference point.
  3. Most of your employees are adults and you expect them to act like adults in all other ways.
  4. Underlying problems don’t require secrecy, they require fixing.
  5. Put accountability where most of us want it anyway, in the hands of managers.
  6. I’ll just throw this one in for free — Transparency laws.

Top 5 Detail

Making it up
  • This is a very real outcome of not communicating compensation. For example, a base pay program is typically the largest ongoing investment an employer will make, yet one of the areas that can be shrouded in greatest mystery when pay grades and ranges exist but are closely held secrets in HR. And the associated HR strategy implications in areas like succession planning and career development can’t be overstated if an employee doesn’t know what sort of pay opportunities you’ll offer them for their continued growth of skills and abilities. Without facts from you, other opportunities with known facts are certainly more realistic outcomes.
Negative Reinforcement
  • Your employees make decisions every day about their engagement. The anxiety that can be produced in a person when managing critical aspects of life without sufficient information isn’t something that should come from something that represents a major part of someone’s life and livelihood. And even though it’s not really lying, you’ve got to dance your way out of it every time someone asks you a question your policy doesn’t allow you to answer, and that doesn’t leave a lasting positive impression either.
Act Like an Adult
  • Maturity is a two-way street. Since most of your employees are adults and you expect them to act like adults, what makes you think they can’t handle the truth? The best example I’ve experienced of telling the truth about compensation was at a company I worked for during the first recession, when we knew we weren’t going to be able to give base salary increases that year. We told employees three months in advance of the usual date. Sure, there were a few rants, but by the time it came to execute the program, it was a non-event.
Fix the Problem
  • If you have something uncommunicated because it would cause unrest, fix the underlying problem – design, training, whatever, don’t mask it. Salary range spreads causing compression? New hires coming in above current employees? Neither a good reason to stop communicating about pay ranges, but good input for the next program design cycle. Segmenting your promotions budget so organizations with more entry-level employees get more funding? Explain how job families work and the concept of promotion velocity for early-career employees. These aren’t difficult problems to solve when you communicate openly.
Manager Accountability
  • Providing needed compensation information to those who make the day-to-day decisions about the base pay, promotions, classifications, bonuses, recognition, etc. only makes the most sense. One common issue with open compensation communications is who has control. After all as it is frequently said, information is power. Do you really need “Compensation Power?” or can you afford to let managers do what their job descriptions tell them they are supposed to be doing? Sure, there are some who abuse it, but realistically that is a small minority. Most management jobs come with some level of fiscal authority anyhow, and in most cases that is many multiples above what we’d ask of them in a compensation program.
Legislation
  • Transparency laws. Every state is a little different in what is required, and this is an area that is constantly changing.

I strongly encourage you if you see yourself somewhere on the secrecy side of the communications spectrum to re-evaluate your approach to compensation communications. At least start asking yourself whether the way it works now couldn’t be improved. Good communication won’t repair a flawed rewards program, but ineffective communication will cause a well-designed program to fall short of expectations.

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly.

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Big, Hairy, Audacious Compensation

Big, Hairy, Audacious Compensation

A while back (1994 to be exact) a term called a BHAG (Big, Hairy, Audacious Goal) was coined.  Think Boeing in Seattle getting into the jet airliner business as an example.

What do you think the compensation plan was like for Boeing executives and engineers?  Do you think it matched the size, scope and impact of their goal – and accomplishment?

Probably not.  And probably never really entered the mind of those, or most rewards designers since.  Isn’t it time to re-think what rewards should look like when someone really and truly “hits one out of the park?”  I’d say so.  It’s not going to be about what the surveys say, or what percentile you decide to pay at.  It should be differentiation on a scale beyond all those things.

Naysayers – WNDITWB

Some might continue to point to their existing plans and programs and say, “That’s what our recognition plan is for,” or “That would be covered in our annual incentive plan,” or “But then they’d make more than the CEO,” or even “We’ve never done it that way before,” (or WNDITWB)

(That last one makes me shudder.)

I recently worked with a client, a small but fast-growing software firm with offices in Silicon Valley and Portland that is making big inroads into data storage and management.  The path to success is clear – create growth and you create value, and being able to do that without outside financing creates exponential value.  Wouldn’t we all agree that creating exponential value would be worth exponential rewards?  Now not something unreasonable, but it has to be impactful.

Think Differently

In my client’s case (software as a service) we discussed the real drivers of value in that SaaS space where they play  – long-term contracts, pre-paid business and attracting logo business.  Other industries will of course have other value drivers that are specific to their type of business, competitiveness, and where they are on the business cycle (start-up, growth, maturity or decline).  Now here’s the thing about rewards under the BHAC thinking.  The amounts can’t scare you, no matter your industry or experience.  They are, by design, BIG AND SCARY (and of course, hairy but that’s not something I’m going to blog about)!

What might a $2M, 2-year contract be worth under a regular commission plan?  5%?  So $10,000, and if structured like most plans, pay that out over the life of the contract.  $416.67 a month – THAT’s exciting!!

It’s the Value, stupid

This isn’t necessarily intended to just get you thinking about sales incentives though.  And as I said earlier, it isn’t going to help if you get caught up in percentiles.  A BHAC plan is about VALUE.  Who would look back 2 years after landing a logo client in Los Angeles that doubles your revenue and increases your market value by $5M and say, “Gee, it was probably a mistake to pay Colleen that $50,000 bonus, don’t you think?”

Let’s pivot to a favorite value creator, product designers.  Could be software engineers in Santa Clara or apparel designers in Beaverton.  I may be wrong, but from my experience, those roles typically come with a caveat on who owns what, i.e., intellectual property.  One company I worked for years ago had a very talented stable of design engineers who over the years created product after product that were patented.  Their reward?  A nice plaque, an original copy of the patent with their name, maybe a promotion, maybe a few percentage point increase in their merit increase that year.  If the company also did well that year, maybe a somewhat larger bonus (say 20% instead of 15%).  Again, how exciting is that?!

Go Wild?!

We do need to be a little careful though, BHAC isn’t necessarily for everyone.  Some occupations (engineering being one) attract the type of person who may get enormous satisfaction just from the accomplishment.  Some cultures (no matter what the occupation) have a much stronger aversion to individual recognition than others.  Still, it can’t hurt to think bigger than where the data usually lands, right?

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services that could help with your BHAC plan include Executive CompensationSales Compensation and Short and Long-Term Incentives.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

Think creatively about compensation and rewards for your deal makers and paradigm breakers.

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4 Important Reasons to Turn Down a Counteroffer

4 Important Reasons to Turn Down a Counteroffer

About 20 years ago, I decided to leave my job since I felt unappreciated and underpaid. After applying at various companies and going through multiple interviews, I received a job offer that included a significant salary increase.  I was on cloud nine! Now, the hard part – telling my boss I was leaving. That night, I carefully drafted my resignation letter as I didn’t want to burn any bridges. The next morning, I walked into my bosses’ office and tendered my resignation. What happened next came as a complete surprise – a counteroffer.

WOW! I was ecstatic. I had two companies competing for my skills and experience, and both offered a significant salary increase. That night, I went home and celebrated over a glass of wine with my husband. However, the next day, I started to feel bitter. Why did it take a job offer from another firm for my current company to offer me a market competitive pay package? Ultimately, I chose to leave my current company and accepted the position with the new firm.

As a Compensation Leader, I’ve encountered multiple instances where managers scramble to pull together counteroffers in an attempt to retain their key employees. Managers typically ask employees “What are they offering you?”, and then the auction process begins.

4 Reasons to Turn Down a Counteroffer 

  1. Ask yourself “Why is it that I’m now getting a raise?” It’s not that you just became more valuable to your employer. It’s because your manager wants to avoid the work disruption that would occur if you left. Raises should be given based on your individual contributions and performance and should occur proactively by management, not reactively due to a resignation letter.
  2. You may later find your relationship with your employer has fundamentally changed. Your company might be trying to buy time to search for a replacement, figuring that it’s only a matter of time until you start looking again. You might accept the counteroffer only to find yourself out of a job soon thereafter.
  3. The reasons that you started job hunting in the first place may still exist. Many people begin the job search due to boredom with the work, dislike of their manager, or unrealistic deadlines. Increasing one’s salary doesn’t address the fundamental issues that may still exist.
  4. The new employer may never consider you a viable candidate in the future. After spending countless hours going through their hiring process, they may be wary of considering you for a position later.

In a prior blog, I addressed the Top 5 Employee Retention Strategies in 2021. Managers should shift from “reactive retention” to “proactive engagement” in order to avoid counteroffer situations.


Nancy Ellington is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the US in public and private companies. She has over 30 years of experience in corporate leadership roles and consulting, and lives with her husband and two kids in Redmond, WA.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

As a Compensation Leader, I’ve encountered multiple instances where managers scramble to pull together counteroffers in an attempt to retain their key employees. Managers typically ask employees “What are they offering you?”, and then the auction process begins.

Read More