By Edmund B. Ura, J.D.
A sound compensation plan will not guarantee success in recruiting and retention, but the lack of one can guarantee failure. There are many reasons candidates decide to work somewhere, and employees leave their jobs for many reasons. However, a recent study by the Society of Human Resources Management (SHRM) points to the fact that pay is the most cited reason for leaving a company and the most cited reason for staying.
An effective compensation program requires:
- A method that determines pay opportunities for various jobs (“pay grades and ranges”).
- A method for paying employees in the same job fairly and equitably.
Together, these processes will tell you the “price tag” for every employee and what you will need to pay to recruit and retain the right person for the job.
Developing a Pay Structure
Pay structures have to be affordable, fairly designed and competitive in an employer’s market. To do this requires balancing two factors—the value of a job to the employer and the value of similar jobs to other employers in the market.
- The value of a job in the market is easy enough to understand—pick up a survey that provides data for similar jobs in the right markets. Sounds simple, right? Well, it might be except that much of the readily available data (particularly free online sources) is badly flawed. Relying on it can make you feel you are competitive, but end up making you a training ground for others. For the best sources, look to your trade associations and professional societies, employer groups and professional services firms that specialize in compensation. Also recognize there may not be any data at all for some of your jobs.
- The value of a job to any employer is more complex than just how titles match to surveys. Few jobs will be exactly the same at other employers, and in small and growing businesses, employees can wear multiple hats. A survey simply won’t help with that unless you’re prepared to come up with complicated formulas for adapting data to your needs. What you really need is a structured way of valuing each job to your company.
All employers can benefit from a structured approach to compensation program design that begins with “job evaluation”—a way to determine the value of each job to your company. There are many tools for this, varying in complexity, but all share the goal of looking objectively at job characteristics that reflect how someone in a job can contribute to your success. These tools give ways to make sure jobs with similar value have a similar pay opportunity. Labor market data for true “benchmark” jobs can be used to create pay ranges that are as competitive as you need them to be (and can afford).
Pay structures also need to be maintained to be useful. Do it annually. The overall labor market in Michigan has increased at about 2.25 percent per year for the last 25 years. Neglecting to adjust your pay structure, recognizing the market moves at different rates for different jobs, can quickly throw you off by enough that you will be less able to compete.
Paying Individual Employees
Having the right structure provides context for individual pay decisions. Creating and following practices that take into account skills and performance ensure that employees feel they are paid fairly based on their work. The simplest methods, even those that employers most often use, typically aren’t the best. Seniority-based pay values “not getting fired” more than it does “working hard.” Giving everyone the same increase every year locks employees into where they were when they were hired and suggests everyone is performing the same. And many merit-pay plans fail because they don’t generate enough differences to reflect employee value.
A better approach is simply to pay people what they are worth. If you have pay ranges, make sure they have “targets”—the amount that your data or program tells you is fair and competitive for someone doing the job the right way. If you know a job is worth $15/hour to you, and you start someone at $12/hour, they should be at $15/hour as soon as they’ve shown that they can do the job the way you want it done. If it takes six months or six years, bring them from where they started to where they should be as they develop. This will make it much less likely they will leave.
Many find it difficult to imagine giving employees multiple dollar increases, particularly when your own pay is based on your bottom line. But failing to stay competitive is even more expensive (the cost of recruiting, hiring and training staff, the lost productivity when jobs are unfilled or filled with less productive trainees and the loss of “institutional knowledge” that occurs with turnover).
Pay for the value you get from your employees. For both the long and short term, paying fairly, equitably and competitively is the best way for any organization to succeed in achieving its mission.
Edmund B. Ura, J.D. is a founder and the President of Merces Consulting Group, Inc. (Merces). Ed works with human resource and general management, director and board committees to assist them in developing compensation strategies and programs. He is an account manager for clients in many industries, including manufacturing, finance, nonprofit and healthcare, for assignments in all areas of employee and executive compensation.