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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
 

Think Outside the Box: Better Labor Cost Management

Think Outside the Box: Better Labor Cost Management

Home » Wages

“What is our average compa-ratio, Jim?” asked the CEO as I sat down to report on our annual focal exercise.

Having been through enough of these meetings over the years, of course I had the answer; as a matter of fact, I had it calculated not only for the whole company but for each division, each country, and each corporate function. But I didn’t want to just spout off the answer, I wanted to educate him about how to think differently about his labor cost. Unfortunately, he had worked with enough compensation professionals over his storied career and had been taught by each and every one that if he could just get the compa-ratio to 1.0, another year could be put in the books.

“We ended at 0.99,” I said, “but what I really wanted to review with you was…”

“That’s great Jim, and tell your team that Jerry thinks they did a grrreat job! Could you ask Kathy to come in here on your way out?”

I shook my head again as I headed for the door. Not only because he still referred to himself in the third person, but again I was not getting the sort of traction that would really make a difference in the company’s performance. I mumbled to myself, “Yes Jerry, it’s just wonderful to know that all your averages are aligned. In addition, do you know you have 20% more Senior Professionals than your competitors? Do you know that when it all adds up our labor cost is 4.5% more than your competitors, and on a $200M payroll, that’s $8M, or about $0.05 per share?”

As the aisle row occupants of cubeville stared at me talking to myself again, I decided I needed a better approach than expecting the CEO to just nod his head and hang on my every word. What I needed was a few more people with some time and some skin in the game in order to make the difference bottoms-up rather than top-down. I needed people with shortages of resources to get their jobs done. I needed Human Resources.

Even then it was a hard sell. I had a solution looking for a problem. I finally found an ally in the HR Director of the Technical Services organization, a group that was in the process of trying to manage her global labor cost through a planned migration to lower cost-of-labor markets and away from some of our higher-cost US urban locations.

It didn’t take long for her to get it – it seemed she was “high-potential” after all! Her organization’s costs and associated factors looked something like this, with these assumptions:

  1. Our average wages were the same as the market at each job family level
  2. Our benefits were equal to the market, 35% of base pay
  3. Our incentive targets were competitive and identical to the market

The difference in how we’d looked at this in the past was taking off the “Jerry Glasses” and looking at the data in a whole different way – our total labor costs, not just our average labor cost… our “Portfolio” of employees. You see, you have choices in how you manage the decisions around factors and variables that make up your labor costs, even while maintaining the typical “50th percentile” strategies that so many companies employ.

So even though we’re matching the market in all the traditional senses we’ve become accustomed to, we’re still exceeding the overall market cost-of-labor by 4.5%, or with this example the sum of $13,000,000!! Would that make a difference anywhere in your business – hiring more skilled technicians, salespeople, funding a new product line, avoiding layoffs… you fill in an example.

How does this happen? Here are a few things to check for after you’ve done an analysis like this:

  1. What is your promotion policy and practice? At Our Co, we enabled a process that says that people can come to expect promotions when they are high performers. Nothing really wrong with that on the surface, but it got away from us, and we didn’t take into account how many people we already had doing work at senior levels. We probably should have thought about more rapid promotions for employees hired at lower levels and slower rates for higher leveled employees.
  2. We’ve had a few difficult years on the merit budget, so pay increases have been hard to come by. But when a new employee is hired, they can be hired at pretty much whatever level the manager wants. Our managers started over-hiring levels because they didn’t expect they’d be able to give pay increases. We’ve got a lot of competitively paid but under-skilled people as a result.
  3. We’ve ruled out the geographic labor cost issues – we know that the cost of labor is higher in places like the Bay Area, so that’s not a factor here.
  4. Obviously we also discovered a few more dollars hiding from us, since incentives and benefits are a factor of base. Never forget that, as a business it’s all about fully-loaded labor costs.
  5. One thing we did do right was we “gated” movement into the P5 or expert level of the job family. That means it requires additional approval to promote or hire someone there. It is more administration, but at that level the responsibilities are so much greater and implications of misplacement are of greater consequence so it’s worth it.

What can HR do with data like this? Thinking first of a popular topic, how about an element of workforce planning, as in an overlay around labor cost? How about coming to the table with a proposal to reduce labor costs over time by realigning skill requirements and leveling? Obviously, there are many other aspects of workforce planning to consider, but armed with cost-of-labor data, a smart HR Leader can create hiring plans around needed skills and determine whether training and development may enable business needs rather than taking an expensive hiring or replacement route.

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we’ve been training everyone else to do so for so many years.

——

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/

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we've been training everyone else to do so for so many years.

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Follow The Leader

Follow The Leader

When I first thought about this idea — that a lot of what we do in the compensation world is to follow the leader — it was the children’s game that came to mind.  Remember – if I’m the leader and I skip in a circle, you do to; if I put my right-hand pinkie finger in my ear, you do too.  Sort of a cousin of Simon Says.

Then my mind went to what really happens when we play follow the leader in compensation.  Maybe some or all of this has been on your watch:

  • We let market data dictate what “we believe” jobs are worth and how employees are paid
  • We design incentives based on how our competitors do it, or how the VP did it at her last company
  • We enable management’s somewhat mistaken belief that benchmarking is the only valid approach to program design

When we play Follow the Leader, we handicap our creativity to align our reward programs and systems to our unique business philosophy, strategy, objectives and values.

Throw Out Benchmarking? In Compensation? Heathen!

It’s not my intention to totally scrap the idea that we can learn from others.  Some of the best learnings I’ve had in my career have been from people that have faced challenges and found unique solutions that worked.  For years I kept paper copies of presentations I had attended at conferences, industry meetings, consultant presentations, etc.  And I did go back over them to pull out ideas, but I didn’t take that material and just paste my current company logo in the upper left corner.  It did help though to add elements to programs that would fit the needs of the problem I was trying to solve.  For example, should a bonus program have a payout threshold?  Should a vesting component be used?  These are ways to put real value into company bonus, sales incentive and executive compensation plan designs.

Reasonable Thought

There are other aspects of benchmarking that I am solidly behind (especially when it reinforces my own beliefs!).  Of course, many pay programs are benchmarked to a local market – Seattle, Los Angeles, Phoenix, you name the location and that’s probably right when it comes to certain jobs and levels of pay, for example non-exempt work.  And for example, I see pay practice surveys that show the quantitative metrics participants use in their broad-based bonus plans and the prevalence of that.  (I’d bet right now that not many readers of this know what EVA is, but I worked in a company once where it was the primary metric in the employee bonus plan).  I could easily show how it simply wasn’t appropriate for the level of employee that needed to understand it, but it took an executive departure before we could wrestle that one down.

————————–

(By the way, bonus points if you know the answer to this related quiz question.  What are the two most common quantitative metrics that companies use for their bonus programs?)

————————–

Lemmings?

You might be living under a rock if you’ve never heard (herd?) of Herd Immunity.  (Talk about follow the leader, and yes that’s a jab). One of the more common applications of the compensation ‘herd mentality’ is on market pricing of jobs.  If you are an old-timer like me, you probably know that at one time, job evaluation systems like point factor, classification or factor comparison systems were more prevalent than market pricing.  And if you haven’t taken C2 (the job evaluation class) from WorldatWork, you may never have heard of those.  But much more so than market pricing, they enabled companies to determine how to pay their employees when they selected what was important to them rather than letting the market do it for them.

I still tell my clients that “the market is… interesting… but don’t let it tell you what to do.”  What I mean by that is this: Follow the Leader isn’t always your best choice.  And as a trusted advisor in your company, take heed that if you are going to play that game then you know what you’ve signed up for.

——

Quiz Answer: Revenue and Profitability

Internal and External Linkages

To read other blogs, go here: https://alliancecompensation.com/blog/. Here are some of our services related to this topic: Market Review, Short and Long-Term Incentives, Sales Compensation.

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

————–

Jim Harvey is a Managing Partner with Alliance Compensation LLC, 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 four dogs in Sherwood, OR.

When I first thought about this idea — that a lot of what we do in the compensation world is to follow the leader — it was the children’s game that came to mind.  Remember – if I’m the leader and I skip in a circle, you do to; if I put my right-hand pinkie […]

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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.

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Inflation and Wages: 2016-2024

Inflation and Wages: 2016-2024

What do experts tell us about the economy, inflation and wages?

“The first rule of economics is scarcity.  The first rule of politics is to ignore the first rule of economics.”

-Thomas Sowell

Which is the classic and best understood definition of inflation?

  1. The description of how big a fish that you caught the last time you were out
  2. What it takes to make your exercise bike into an electric bike
  3. Too many dollars chasing too few goods and services

So yes, there could also have been answer D) All of the above, but let’s focus on answer C.

“Transitory?”

Undoubtedly inflation in the US and globally has proven to be more than transitory.  But what is reported as headlines, such as “Inflation Creeps up 0.5% in December” is pretty deceiving in my view.  Let’s look at an example.

First, let’s confirm a fact.  What does it actually mean when we are told that the inflation went up 7%?  It means that compared to the same month one year ago, the cost of goods and services has increased by that percent – let’s stay with 7% as the example.  But what if we’re already 36 months into this economic turmoil?  The numbers for the US:

November 2021: 6.8% – – – – November 2022: 7.1% – – – – November 2023: 3.1%

Do you get it now?  Here in 2022’s case, inflation is 7.1% SINCE NOVEMBER 2021.  I can’t tell you a calculation for additive or compounded, but I can tell you we’re being deceived if we believe that November 2022 is only 0.3% more than November 2020.

Look at the graph below…  Still one of my faves. I like graphs and charts that tell a story.  I found the one below on-line, it’s from the St. Louis Federal Reserve Bank.  It charts the reduction in purchasing power by month since January 2016 and through January 2024, an eight-year period. Going back further than 2016, the line has continually trended downwards, since the Index is set at 1982-84 = 100%. So to interpret, 2016 to 2020 purchasing power fell ~3%, and 2020 to 2024 purchasing power fell ~7%.

What About Wages?

Without showing the graph here (trust me) during the same periods, wages rose 12.9% 2016-2020 and 17.9% 2020-2014. So one side of the aisle would say, “People are better off since 2020 — increase in wages over the previous 4 year period of 7%!” Others will say that wages rose 7% less prior to 2020. So the net effect of compounded inflation since 2020 more than wipes out that seemingly positive spin. Let’s return to those November numbers with an example, say a loaf of bread that in November 2020 cost $4.00:

November 2021: $4.00 x 1.068 = $4.27 – – – – November 2022: $4.27 x 1.071 = $4.57 – – – – November 2023: $4.57 x 1.031 = $4.71

So… in pocketbook/wallet terms, $4.71 is $17.8% more than $4.00. While wage inflation has managed to match that in this example for $4.00 bread, we can’t say the same for rent, childcare, education, and the list goes on.

Now what?

It looks like a “soft-landing” is in store based on most recent trends (see Thomas Sowell quote above). Companies seem to be a little more conservative on salary increase budgets heading into 2024. But we are seeing more aggressive organized labor demands to make up for lost purchasing power. Let’s look back again in a year or so and see if any of this posturing on the numbers that affect real people and their purchasing power looks any better.

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Jim Harvey is a Managing Partner with Alliance Compensation LLC, 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 four dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/, especially Follow the Leader and Think Outside the Box. Our services associated with understanding the market and creating salary planning strategies include Employee Pay Planning ToolsSalary Structures and Market Review.

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

Inflation and Wages Spiral - How should we be thinking about the effect of inflation on wages?

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