Four Steps for Conducting Compensation Analyses
If your organization is like a lot of others out there, it probably gives employees an annual pay increase of about 2 to 4% to account for cost-of-living increases. In many places, these small annual raises have become so automatic that neither the employee nor the organization think much about them. In a normal year, these annual raises might be sufficient for ensuring compensation levels stay aligned with the greater marketplace, but, as we all know, the last few years have been anything but normal.
Most organizations should consider conducting a compensation analysis to guide decisions about wage offers and adjustments.
We have all seen the news about rising inflation, labor shortages, and the great resignation. All of this means wages are increasing faster now than they have over the past several years. A recent Conference Board Salary Increase Budget Survey indicated companies were anticipating an increase in wage costs of 3.9% in 2022, the largest increase in over a decade. To make matters more complicated, wages don’t increase at the same rate across jobs. Depending on the position, raises of much larger than 4% may be warranted.
The recent acceleration and variability of wage increases, along with a tight labor market, have made assessing the competitiveness and fairness of compensation more important than ever. Competitive compensation is critical for attracting top talent, and it also plays a significant role in the decisions of existing employees to remain with the organization. As a result, most organizations should consider conducting a compensation analysis to guide decisions about wage offers and adjustments. The information gathered via compensation analysis allows employers to be transparent about and justify decisions related to employee compensation. Larger organizations may spend countless hours and many thousands of dollars to conduct comprehensive compensation analyses. However, there’s no reason smaller organizations can’t also conduct and benefit from a streamlined compensation analysis process. Below you’ll find four steps for conducting simple compensation analyses.
Review Job Tasks & Responsibilities. The first step in any compensation analysis is to ensure you fully understand the tasks and responsibilities of the positions you’ll be determining compensation for. If you have an existing job description, this is a great place to start. If not, you’ll likely need to create one. Talk with employees to learn more about what they do or ask them to review an existing job description and make updates based on their feedback. For new positions, talk with others about what will be expected of someone in the position and create a new job description based on that information. No matter how you go about this process, you want to ensure alignment between the job title and the tasks being performed.
Conduct a Market Scan & Analyze Data. Once you’ve verified the responsibilities and tasks of each position, you’ll need to gather data from the external marketplace on salary ranges, other compensation components (e.g., bonus), and benefit offerings. If you would like, you can purchase this data from any number of large salary surveys, although this is often expensive. You can also get a lot of useful information for free from places like salary.com, glassdoor.com, or indeed.com to name a few. You might also look into organizations that are similar to yours or that you compete with for staff to see if you can find any information about their compensation practices. Remember, it’s always a good idea to use multiple sources. Once you’ve gathered market information, you’ll want to collapse across sources to determine the range and midpoints for salary, bonuses, and benefit offerings associated with each position.
Establish a Compensation Philosophy. In addition to gathering market data for each position, you’ll also need to determine the compensation philosophy of your organization. How will your compensation and benefit offerings compare to the market or other similar organizations? How will you ensure compensation and benefit offerings are fair and equitable across the organization? What factors (e.g., performance, tenure) will be considered when determining salary and benefits? These are all questions that should be answered by and documented in your organization’s compensation philosophy. Answers to these questions will vary based on a variety of factors including financial constraints, the existing labor market, organization size, and so on. However, most compensation philosophies have similar goals which include attracting new employees, retaining and motivating existing employees, and supporting the strategic objectives of the organization.
Making & Communicating Compensation Offers. After completing the three steps above, you should be fully prepared to make fair and competitive compensation offers to new employees or adjustments for existing employees. Review the information gathered from the market scan process and determine compensation levels for individual employees by considering the different factors you’ve prioritized in your compensation philosophy. Keep in mind that effective communication of these offers and adjustments is very important. These should be communicated to employees in writing so they can easily understand how decisions about compensation have been made. You should also be prepared to answer any questions by referring to your documented compensation philosophy. Although you need not necessarily conduct a full compensation analysis every year, it’s a good idea to at least review compensation levels for all employees on an annual basis. It’s also a good idea to regularly review and update your compensation philosophy.
Although they aren’t the only factors that matter, compensation and benefits play a critical role in attracting talent to an organization and retaining its workforce. By conducting regular compensation analyses, an organization can ensure its employees are being compensated fairly and at competitive rates. This is especially important now as wages are rapidly changing, and people are looking to take advantage of a tight labor market. If you have questions about compensation analysis or would like assistance with compensation at your organization, feel free to reach out!