Welcome to Compensation 101 where we define and give examples for those boring compensation terms we throw around all the time.\u00a0 You\u2019ve heard a lot of them recently and probably experienced some of them, too, as we navigate through a volatile, often unexplainable, labor market.<\/p>\n
Let\u2019s begin with the basics!<\/p>\n
Compensation Strategy<\/u><\/strong><\/p>\n Developing and implementing a compensation strategy means making decisions regarding how your organization will pay employees compared to the external market.\u00a0 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.<\/p>\n LEAD-<\/strong> An organization may determine that it wants to LEAD the market.\u00a0 This means that the organization decides to pay more than competitors. That might be 10% more, 20% more, etc.\u00a0 The idea is that you will be known as the \u201cbest payer\u201d in your competitive markets.\u00a0 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.<\/p>\n MATCH-<\/strong> Most organizations decide they want to MATCH the market.\u00a0 To do this effectively, it\u2019s 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.\u00a0 For example, pay levels for entry level employees have increased more than 10% in 2022 in some geographic areas.\u00a0 Salaries that matched or even led the market a couple of years ago may now lag the market.<\/p>\n LAG-<\/strong> Some organizations determine that their pay will LAG the external market.\u00a0 Sometimes this happens by accident (see example above), but it can be a successful compensation strategy. Pay is important to employees, but often \u201cperks\u201d 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 \u2013 that cost can easily exceed 15k annually.<\/p>\n It’s important to remember that any of these approaches \u2013 lead, match, lag \u2013 can work for you if they\u2019re well developed and maintained.<\/p>\n More Terms Defined<\/u><\/strong><\/p>\n Successful compensation programs are both externally competitive and internally equitable.<\/p>\n EXTERNALLY COMPETITIVE<\/strong> means that an organization\u2019s jobs are valued appropriately compared to jobs in the external market.\u00a0 Think of it as a deeper dive into the idea of matching the market.\u00a0 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.\u00a0 For example, it\u2019s 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.\u00a0 And employees in Accounting, Human Resources, IT, and Customer Service can easily find jobs in other industries.\u00a0 Entry level employees also can choose jobs in different industries, so if you regularly hire entry level employees, it\u2019s critical to understand who else is looking to hire them.<\/p>\n INTERNALLY EQUITABLE<\/strong> means that employees in similar positions with similar skills are compensated similarly.\u00a0 That\u2019s a lot of \u201csimilars,\u201d but similar doesn\u2019t mean same.\u00a0 In organizations with formal compensation structures, internal equity is achieved by assigning specific jobs to a specific salary \u201cgrade\u201d and salary \u201crange\u201d and paying individuals within that range based on performance, skills, length of service, etc.\u00a0 In organizations without formal compensation structures, these same factors are frequently used to determine individual rates of pay.<\/p>\n SALARY COMPRESSION<\/strong> 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.\u00a0 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.<\/p>\n It’s easy to blame salary compression issues on COVID, The Great Resignation, The Great Reprioritization (Fast Company), The Great Recognition (US Department of Commerce), or whatever best describes this crazy labor market.\u00a0 The reality is that salary compression has been a problem organizations have faced for many years.\u00a0 It\u2019s a complex issue that occurs over a long period of time and, as a result, doesn\u2019t have an easy fix. Regular reviews of paid salaries and salary adjustments based on these reviews are critical steps in addressing salary compression.<\/p>\n