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 dough to spend on recruitment and retention, or faces particularly stiff competition for talent.
MATCH
Most organizations decide they want to match the 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 so long as salary information is regularly reviewed and updated as the market changes.
LAG
Some organizations determine that their pay will lag behind 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.
Any of these approaches 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
This means that an organization’s jobs are valued appropriately compared to jobs in the external market.
Think of it as a deeper dive into the idea of matching the market. To be externally competitive, an organization must understand who its competitors for talent are and that these can vary significantly by job type and geographic location.
Employees in roles such as 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
Employees in similar positions with similar skills should be compensated similarly. Worth noting: Similar doesn’t mean the 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.
PAY EQUITY
The term pay equity is sometimes used interchangeably with internal equity.
In the past, the two were pretty much the same, but pay equity has recently taken on a different meaning. It now refers most commonly to legislation (primarily at state levels) requiring employers to pay men and women equally for “substantially similar” work. Some states have expanded this legislation to include fair pay requirements for race and other protected characteristics. The recent labor agreements for equal pay for the U.S. men’s and women’s soccer teams represent the settlement of a pay equity lawsuit.
SALARY COMPRESSION
This occurs when the pay of one or more employees is close to or even exceeds the pay of other employees doing the same or similar work. Salary compression can occur throughout an organization, but is most common when new hires (hard to come by in this labor market) demand salaries higher than incumbents with more experience and when salaries for new entry level employees (also in high demand) equal or exceed salaries for lead or supervisory employees.
It’s easy to blame salary compression issues on the pandemic, The Great Resignation, The Great Reprioritization, The Great Recognition, or whatever term best describes this crazy labor market. The reality is that salary compression has been a problem organizations have faced for many years. It’s a complex issue that occurs over a long period of time and, as a result, doesn’t have an easy fix.
Regular reviews of paid salaries and salary adjustments based on these reviews are critical steps in addressing salary compression.
Ask HR
Q: With rising costs, I want to give my employees a gift card to reward them for their hard work. What should I consider?
A: Acknowledging an employee’s contribution is almost always a good thing. It helps reinforce their commitment to the company.
Regardless of the type, timing, or value of the reward, be sure to give it with the right message. Just handing someone a gift card will not have the same impact as giving it along with a personalized conversation or note about their contribution to express how much you value them.
Worth noting: When you give a gift card (or any monetary benefit) to an employee, you should consider the tax implications. Usually discretionary bonuses—those that are given “just because”—are not taxable. However, if they become expected or a regular occurrence, then they may be.
Palé is a contributor for Affinity HR Group, Inc., PPAI’s affiliated human resources partner, which specializes in providing human resources assistance to associations, including PPAI and its member companies. www.affinityHRgroup.com.
