Getting Started With Compensation Design

Oftentimes when managers discuss pay with their employees, they encounter questions for which they may not have an answer. Employees want to know that they are receiving fair pay for their contributions, so they may wonder how their pay is linked to performance, how it compares to other salaries within the company, and likewise, how it compares to similar positions outside the organization.

Answering these questions is important to retaining talent, which is why all organizations should be equipped with a compensation design that balances company goals and industry shifts. A well-developed compensation strategy also helps to support the execution of the business strategy while maintaining competitiveness.

Yet, designing a compensation strategy that balances internal and external factors requires the consideration of many complex variables. It may be challenging to pinpoint whether your existing pay practices are working or if it’s time to revisit them. To determine whether your organization truly needs to reevaluate its compensation design, here are a few questions for consideration:

  • Why do you want to design or redesign the compensation program?
  • Why now?
  • How does this fit within your overall business strategy?
  • What is the business strategy?
  • Where does this fit into the overall human resources strategy in particular
  • If you don’t do it now, what are the risks? What will happen?

If it is determined that now is a good time for compensation redesign, here is an example of how the typical project methodology might look from start to finish:

  • Internal assessment: review job descriptions and practices
  • External assessment: conduct and review compensation surveys
  • Job worth hierarchy: rank order from low to high
  • Salary ranges: set parameters for pay decisions
  • Compensation policy: ensure that it is fair and equitable
  • Pay-for-performance: set and review performance standards
  • Pay admin manual: review it to ensure consistent practices
  • Communicate: decide what to say and to whom
  • Implement the plan

Your compensation plan should be transparent, relevant, and current. To align the plan precisely with the needs and goals of the organization, compensation professionals must truly be students of their operation. They must also connect the dots to the mission, values, and operational objectives. This will help to ensure a comprehensive and effective pay policy.

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