------------| TRANSFORMING TEAMS
COMPENSATION 101
WHAT DO THOSE BORING TERMS MEAN ANYWAY?
------------ BY SUSAN PALÉ WELCOME TO Compensation 101, where we define and give examples for those boring compensation terms we throw around all the time. You’ve heard a lot of them recently and probably experienced some of them too, as we navigate through a volatile, often unexplainable, labor market. Let’s begin with the basics!
Compensation Strategy Developing and implementing a compensation strategy means making decisions regarding how your organization will pay employees compared to the external market. Most large organizations have developed comprehensive compensation strategies; many small organizations have not. A key component of any compensation strategy is determining how you want to set compensation levels relative to the external market. LEAD – An organization may determine that it wants to LEAD the market. This means that the organization decides to pay more than competitors. That might be 10% more, 20% more, etc. The idea is that you will be known as the “best payer” in your competitive markets. This strategy works well when an organization is growing rapidly and successfully, has $$$$ to spend on recruitment and retention, or faces particularly stiff competition for talent. MATCH – Most organizations decide they want to MATCH the
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market. To do this effectively, it’s necessary to gather compensation information about pay levels for specific jobs and geographic locations. This strategy works well for most organizations as long as salary information is regularly reviewed and updated as the market changes. For example, pay levels for entry level employees have increased more than 10% in 2022 in some geographic areas. Salaries that matched or even led the market a couple of years ago may now lag the market. LAG – Some organizations determine that their pay will LAG the external market. Sometimes this happens by accident, but it can be a successful compensation strategy. Pay is important to employees, but often “perks” such as flexible scheduling, remote work, and generous PTO can be equally important. Some Affinity HR Group clients pay the full premium for family medical coverage—that cost can easily exceed 15k annually. It’s important to remember any of these approaches—lead, match, lag—can work for you if they’re well developed and maintained.
More Terms Defined Successful compensation programs are both externally competitive and internally equitable. EXTERNALLY COMPETITIVE means that an organization’s jobs are valued appropriately compared to jobs in the external market.
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Think of it as a deeper dive into the idea of matching the market. To be externally competitive, an organization must understand who their competitors for talent are and that these can vary significantly by job type and geographic location. For example, it’s important to know what industry pay standards are for certain positions, but if your new hires usually come from other industries and employees leave to take jobs in other industries, that information may be less valuable than information specific to a geographic area. And employees in Accounting, Human Resources, IT, and Customer Service can easily find jobs in other industries. Entry-level employees also can choose jobs in different industries, so if you regularly hire entry-level employees, it’s critical to understand who else is looking to hire them. INTERNALLY EQUITABLE means that employees in similar positions with similar skills are compensated similarly. That’s a lot of “similars,” but similar doesn’t mean same. In organizations with formal compensation structures, internal equity is achieved by assigning specific jobs to a specific salary “grade” and salary “range” and paying individuals within that range based on performance, skills, length of service, etc. In organizations without formal compensation structures, these same factors are frequently used to determine individual rates of pay. building-products.com
