Creating a Compensation Strategy for Your Organization

We're going to focus on a couple of key elements that any organization needs to be thinking about whenever they're focused on creating a compensation strategy. So one of the first things you may ask is why are you talking about strategy? Because compensation really goes back to how much you pay somebody. Well, there's actually a lot more elements that go into compensation strategy that we wanted to talk today.

So just get ready for, to get , um, uh, be focused on learning some new things about this area. One of the key things here you've got to focus on is first of all, it's competitive pay. How do you know as a business owner or business leader that you're actually paying your employees competitively? It's interesting when we actually ask a number of prospective clients that we talk to on a regular basis, quite a few of them say, when we ask them about, do you know if you pay competitively or not?

Lots of times, they actually say, I have no idea. I think I do, but I know I lose people on a regular basis because we don't pay competitively. So that's one of the first things we wanted to focus on here. You should at least every two to three years externally benchmark your positions against the outside market. That's something that can be done very easily. You can find somebody, perhaps somebody, if you have an HR person internally can help you do that.

And if not, you can go outside and find an HR consultant who would be able to do that for you. Because one of the key things is that year over year positions continue. The pay for positions continue to change and is quite often there are, what's considered our hot jobs or hot positions that actually are moving much flask faster than the , the pace of inflation for certain positions.

So making sure you're paying competitively is going to be critical and retaining and developing and motivating your top talent. So that's one of the first key elements is making sure you pay competitively and focused on doing an external benchmarking exercise and process across the organization on a regular basis. I'd recommend about every two to three years. The next thing you need to focus on is really creating pay bands or pay grades depending on the size of the organization you are within.

So even the company that's , um , 50 employees or a hundred employees should have some level of pay bands or pay grades. They can actually, they can actually love together like positions. And when I think like positions like positions of scope and complexity, so you may have a position in sales, a position in operations, a position in quality and a position in accounting that should all be paying somewhat within, let's say two to $3,000 of each other.

And that's where you'd actually create pay grades or pay bands within your organization. It's really critical, not just from an HR perspective to create a career ladder for employees, because employees want to know where they can go next. And unless you have somewhat of a career ladder and different steps or rungs on that career ladder, then you can't really give an employee a really consistent or informed answer. So that's why having pay grades or pay grands bands are very, very important.

And if you have an organization let's say for about a hundred employees or 250 employees, you probably only need to have, let's say three, four, or maybe up to five pay bands , but that's something, again, you can work on yourself. If you have somebody who's an HR professional on staff, or you can bring in an HR consultant to be able to help you work through that process. The next thing we wanted to focus on is pay for performance. You've got to make sure you're paying for performance.

When I talk about that is just, I, I cringe when I hear some companies talk about giving a cost of living adjustment or a Cola. And the Cola idea on the cost of living adjustment is all based on how much a loaf of bread or a tank of gas is going to cost somebody. And that's somewhat of a little bit of an antiquated view on pay increases. So if you're going to say, well, a cost of living adjustment is 2%. Then I'm going to give everybody in my organization a 2% increase, what that does.

It creates really, really bad situations in your organization. First off your key employees and your top employees are going to get de-motivated by doing that and your lower performers, possibly newer performers, lower performing employees are going to actually going to be thrilled to be getting an increase. And if they find out they're actually getting the same increase, what's going to happen.

Your top talent is going to be upset with you and a little bit, you know, a little bit hacked off and your bottom people are probably going to be pretty happy. So you're really for what you're doing within pay. You're not actually motivating any kind of any kind of right behavior. So when I think about pay for performance, let's say you have a 3% increase on your total payroll line. So let's say you're , let's give a simple example.

So if you have a hundred thousand dollar payroll for your organization and you're giving a 3% increase, that means you're giving off of a hundred thousand dollars payroll. You're giving $3,000 of increased dollars that year. What you want to do is make sure for the top talent, the key people within your organization and your top talent are really going to be your top 15 or 20% of your workforce. You're actually going to be giving them a higher than a 3% increase.

You're going to be giving you something more the lines of perhaps four to 6% increase. Of course, when you start to think about the math, that means you have to give some of your lower performers, a smaller increase or possibly even no increase because you want to incense and you want to retain your top people.

And if some of your lower performers leave your organization, that could actually be a good thing, because that could actually get your , give you the opportunity to actually hire somebody. Who's not a C player, but actually somebody who is an, a player or B player. So it's actually going to create a better performance , uh, level within your organization.

And then the last thing we wanted to talk about here is when you're thinking about compensation, the other key thing that we try to work with our clients on is making sure they think much more holistically than just pay your base pay and what somebody makes every few weeks on their paycheck is only one component of pay and comp is one component, excuse me, of compensation. There's a lot of other facets to it. Do you have a bonus structure?

Do you have a 401k plan that you match a dollar for dollar or at a percentage level? What is your vacation or PTO policy look like? What are your benefits constructed by and how competitive yours is your benefits package? Because those are very expensive. Those costs continue to increase yearly. So when you think about it to think much bigger than just compensation, equaling pay, because compensation equals all the facets of how you actually, all the costs that goes into an employee.

So a lot of companies talk about this as maybe their fully loaded cost or their burden cost or something like that. So make sure you be thinking you're thinking much greater and much bigger than just how much it get person gets paid, because all of the things go into your total compensation package and they ultimately drive about 50 to 75% of the employee costs within any organization.

Again, that's a huge number, but you think about it, all of the costs that drive your employees are the most costly asset within your company. So making sure, as I mentioned, it's 50 to 75% for any business that I've ever worked with. And that's critical because you want to make sure you're using those dollars very wisely. So that's why it's always great for a leadership team to be focused on having a clearly defined and consistent compensation strategy for them.

So that's what we wanted to finish up with today. So that about covers it. Thanks for listening and for more things pertaining to HR, visit us at hrcatalystconsulting.com. And don't forget to like us and subscribe to our podcast until next time. This is Mark Mitford. Thank you much.