What is compensation planning? A guide to retaining top talent

A clear compensation strategy based on market data can help establish career paths for your most valuable employees and ensure they’re less tempted to seek a market correction from another employer.

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First is the question of whether you should implement pay ranges or pay grades. Pay grades are often a better option for smaller organizations with fewer locations, Praast says, because grades have similar market value and internal value to the company. If your organizations offers more than 30 job types or if you operate at multiple locations, then a grade-based structure is probably best; otherwise, you are probably just fine with a pay range.

As an example, Praast uses a role with an annual pay range between $20,000 and $32,000. Newer or less-experienced employees should start near the minimum. The midpoint should align with what the market is bearing for that role, and the maximum is for high-performing employees or those on the cusp of being promoted into a higher-level role; at which point the cycle starts again with a new range, Praast says.

To fit existing jobs into your determined ranges, you’ll need to reference your market data to find the closest midpoint to your target percentile and then adjust for internal alignment, location and market conditions. Establishing multiple levels, like junior and senior software engineer, can help maintain your salaries within a market-competitive range while still allowing for career growth and progression, Praast says.

To establish the width of your pay ranges, first reference your lowest paid jobs in the market. This should be the starting point for your range structure, she says. Compare that value to the highest-paid value in the organization to find the range of pay across your entire company. Now you can segregate the ranges within that larger framework, she says. The tricky part is figuring out the appropriate number of steps or grades that fall between your minimum and maximum without introducing too many grades, but still creating enough grades to allow for career progression, Praast says.

You can do this by creating midpoint differentials, which determine how far apart the ranges are. A typical midpoint differential spans between 10 percent and 20 percent, she says.

This is where the science and art collide, Praast says. Each organization will have unique needs, so there’s no boilerplate number of grades to create. It’s about knowing what feels right for your company.

The ranges toward your minimum value — your entry-level jobs — will be more narrow, whereas the ranges at the top of your organization — your executives — will be much wider, Praast says.

“Entry-level positions will have less variation in the market as to how those jobs are paid, and employees tend to move around in those jobs. They’ll move up, or over, or into new roles altogether. So, there aren’t a lot of reasons to create varying ranges,” Praast explains. “But when you think about executives, higher-ups, they tend to stay longer and have a lot more variation in the market as to how those jobs will pay. So, by making these ranges wider, you’re helping to control some of these variables.”

Implement the plan

When implementing your plan, the first, and arguably most important decision, is how transparent will your compensation plan be when it comes to looping in your employees, Schuman says.

“Ultimately, your choice is based on your company, culture and your talent strategy as far as what you want to achieve with your comp plan,” Schuman says. But you’ll want to establish the level of transparency that will foster greater trust and engagement among your employees and quell any “watercooler talk” that could engender resentment and frustration.

“You don’t want people whispering about, ‘Well, why did Bob get that raise but not Joe?’ or ‘How come I’m getting paid less and I do more than such-and-such?’ You want to provide clarity around how pay is determined so your employees trust that they know where they are, where they’re going and how they can get there,” Schuman says.

Transparency doesn’t have to stop at pay. You can also provide transparency around the market data sources you use, your pay structures, grades and ranges, and so on, Schuman says.

“Any move you make in this direction moves the needle on engagement and trust, because you are sharing information,” she says. “You can share information about benefits — what are the costs of medical? How much are you spending on transportation benefits? So, if you’re giving insight into what you’re paying for and what you’re spending on these [additional benefits], that helps, too, because these are things that tend to get overlooked” when employees think about compensation, Schuman says.

When sharing information, consistency is key. Managers should be in step about what they are sharing, when and how; the best-laid comp plans can be derailed if managers aren’t consistent when sharing, Schuman says.

“You want everyone to see and hear the same information, at the same time, so you aren’t having one team or department feeling like they’re getting information before others,” she says.

You should also develop policies and processes around compensation increases, new hires, promotions, performance outliers, raise and promotion eligibility, and job vacancies. And you should determine how often you evaluate pay, and whether managers have input on pay.

“This is something you want to be really clear about. You don’t want this to be a back-office, secret set of policies that require wizardry,” Schuman says. “What are your promotion policies; does employee pay increase within the range? By how much? If new jobs are promoted, are they starting at the bottom of their new range? Or will they start at 7 percent to 15 percent of their new range? Once you decide these things, write them down so they are clear for everyone.”

Building a comprehensive compensation strategy isn’t easy, but it can reap rewards both in cost and in employee engagement and retention. More importantly, you don’t have to turn on a dime when it comes to compensation strategy, says Praast.

“It’s okay to take baby steps. It’s very hard to walk back things if you’ve already shared them, so figure out where you are, where you want to be, and what things you can do and what you can share to get you to that point.”

Some immediate actions you can take, according to Schuman and Praast:

  • Clarify your business goals and align them with your compensation priorities.
  • Track where you recruit from and where attrition occurs.
  • Ascertain whether there’s a specific reason people are leaving and where they’re going.
  • Familiarize yourself with market data sources.
  • Build sample ranges for your top 10 mission-critical jobs.

Copyright © 2018 IDG Communications, Inc.

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