It’s important for organizations, companies, agencies, and small businesses to have compensation plans so they know how to spend their money appropriately. What’s the correlation between pay and business goals? How do you reward the values you hold dear? How can you keep, motivate, develop, and attract top talent? What’s the best way to pay for mission-critical jobs compared to other positions?

More importantly, which HR employee management system do you trust to implement your compensation plan strategy?

The 2021 Global Payroll Survey results published recently by data and technology firm EY reveals that more organizations are investing in formulating their payroll strategy. They’re assigning more importance toward effective payroll operations and wage planning. About 66 percent of organizations had a formalized payroll strategy in place as of 2021, up from 61 percent the year before.

Compensation plans usually have a philosophy, pay guidelines, policies, and processes. But your plan needs to be constructed from the ground up. Here are some basic rules to follow.

Make Sure You Have Executive Support

Without support from higher-ups, not much happens. Making sure they’re on board is the first step. Getting payroll wrong is costly since it’s usually the biggest company expense. While a small change in payroll can make a big difference, even a tiny change in opportunity cost or unseen trade-off can make a huge difference too. When you pay your employees right, you keep them, motivate them, and attract them. Without them, you can’t succeed.

Many workers quit jobs because of pay. Employees will find what they’re worth somewhere else if they’re not paid enough. Compensation is easy to screw up, especially with some of these common errors:

  • An unstructured, poorly thought-out plan is put in place.
  • Human resources is secretive about pay decisions.
  • Managers aren’t empowered to fix problems.
  • Compensation isn’t updated enough or regularly.
  • The company raises everyone’s pay without paying attention to individual worker performance or job structure.

What’s the best way to get your executives on board? Just remember: business results and compensation go hand-in-hand in their minds. If you’ve lost key talent due to compensation mistakes, share your data or stories. Give examples of how your compensation plan will reinforce company culture and solidify your employer’s brand in the labor market. A top workforce management solution is integral to this process.

Set Up a Compensation Strategy Roadmap

Compensation strategies are meant to create intention behind your decisions. You’ve got to ask your organization some tough questions here. Do you prioritize internal alignment over external competitiveness? How about fairness in your organization? Does it include understanding that not every job is created equal?

When building your compensation strategy, here are some important questions to ask:

  • Do you like your current strategy?
  • What should you use that aligns with your organization’s culture?
  • How do you plan to grow your business?
  • To get there, how competitive do you have to be in the job market?
  • How do you specifically compete for talent in your market?

If you’re designing a compensation strategy, remember that a budget-approver with a dozen other things on his or her plate will have to justify the “whys” and “hows” of your strategy.

Pay Workers According to the Market

It’s a worker’s market right now, and talent can be tough to come by for some job roles. As you compete for talent across a region, state, or the entire country, you can’t just look internally to determine pay. You’ll need to get a sense of the market value and going rate of the job to figure out how to pay competitively and retain and attract the best people. To price your jobs properly, you’ll need two things: a solid understanding of your jobs and a source of market data.

You can start by reading your job descriptions to get a better sense of what your company does and what the position actually entails. The core tenants of a job position doesn’t change too often, so if your job descriptions aren’t current, don’t worry. Unless your company is growing or changing fast, the job is the job.

For certain jobs, you’ll need to create a compensation profile that includes core tasks and responsibilities, years of experience, critical skills, education, certification, and some specialty skills. For instance, salespeople need to know the selling cycle and typical deal size; and managers need to know their sphere of influence and how many people they report to.

Getting quality market data is the next step. Crowd-sourced data, traditional third-party surveys, government data, and industry surveys are all great options. Make sure your data mix is right, and evaluate your sources. Your organization needs good data that covers your jobs and locations, is updated enough to stay on top of your competitors, and is thoroughly validated.

Ensure you’re looking in the right labor markets by applying your strategy. Using your strategy will also help you decide what market data to source. There are many solutions out there that can compliment the right HR and employee management software.

Calculate Pay Ranges

Your next step is to figure out what your jobs are worth. Use your industry’s market as a guide for your organization’s pay. Once you’ve got all your market values, it’s time to develop internal guidelines for pay or pay ranges. You can create pay ranges in a semi-formal or formal way.

Using the market value as your midpoint, build ranges around it. Ideally, you will have a range for each job in each place. With a pay range, you’ll know where to hire people, how to move their pay through the role based on their performance, and when to cap it.

Pay grades would be the formal approach. Grades help identify internal alignment and demonstrate progression within a job function or family of job roles by organizing ranges mathematically. Pay grade models let you determine how wide your ranges should be and how much overlap between ranges you need. By aligning the market value of your jobs with the closest grade midpoint, you’ll slot them into the grades. After that, you’d do a review to make sure internal alignment is appropriate.

Some organizations are mixing grades and ranges. In most cases, they use grades, but for critical jobs they use ranges. As a result, these organizations remain more flexible and stay current.

You might want to think about how much you want to share with employees as you build-out your pay guidelines. Be prepared to explain your decisions succinctly if you want to be transparent.

Put Your Plan Into Action

Your compensation plan is nearly finished. You’ll be leaving out some important steps if you stop here.

  • There’s more to compensation planning than just a philosophy. It should include a strategy, pay ranges or grades, policies, and processes. Your plan will be easier to understand and repeat if you include these two things.
  • Possibly increase your budget. Now that you have a plan, you can consider how much to be flexible budget-wise. Think about market movement, performance, and internal equity adjustments.
  • Take care of outliers. It’s possible to have job candidates or current workers below or above range. Your policy should have a typical way to handle outliers. If they’re low, do you automatically bump them up? If they’re high, do you freeze pay? There are a lot of extreme options here, but you can be creative with other choices.
  • Make sure managers are equipped. The overwhelming majority of managers and employees discuss wages and salary. Despite this, very few organizations trust their managers to have tough pay conversations. Provide managers with resources, train them on compensation, give them organizational context, and let them practice the trickiest conversations before they go into them.

With these tools — and with the best workforce management solution in place — you can create a smarter compensation plan. In 2022 and beyond, having a plan is right up there with the same reasons for why HR technology and smart workforce solutions are worth investing in. Your company values will be better aligned, you’ll be able to budget for your most impactful expenses, and your employees will be more aligned.

Contact VCS Software for information and insights.

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