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Compensation 101: Building a strategy that supports small-business success

Published in the Rochester Business Journal

How effective is your compensation strategy? Does it reward results and recognize potential? Is it helping your organization achieve its goals? Or, as one business owner recently lamented, do your employees “earn” raises simply by showing up for work?

There is no shortage of theories on how best to compensate employees. But most agree on one reality: The question of pay holds more power to upset employees – deeply and for prolonged periods – than possibly any other factor in employment.

Successful organizations view a sound, unemotional compensation strategy as an indispensable management tool. Aware of the high costs of payroll and benefits, these companies strive to get the most out of their investment in employees.

In recent years, developing and adhering to a well-grounded compensation strategy has become more relevant as web-based salary surveys - often based on unsubstantiated data - entice employees to push for raises. Employers - particularly small ones with limited cash resources – can withstand employee pressure more successfully when they are strongly committed to and able to defend their compensation strategies.

Defining a compensation philosophy

Does your growing business adhere to a philosophy that rewards those who contribute to its success? Many employers give lip service to this concept, yet they approach compensation in a haphazard way, often allowing the tail to wag the dog. Personalities, gut feelings and the demands of “squeaky wheels” too often drive the compensation system.

The best-run companies – including small ones – consciously build and support a culture that says, “We recognize and reward exceptional effort and results,” and consistently emphasize the link between company profitability and compensation.

These companies also invest the effort to create a formal compensation strategy. Why? Because payroll is one of the largest expenditures for a company, and senior managers are clear on their expectations for realizing a substantial return on that investment.

An effective compensation plan ensures that pay is consistently and properly directed to the jobs and individuals that contribute to the organization’s success. It is based on internal equity and external competitiveness. A well-designed plan also acknowledges the importance of non-cash elements – such as an array of insurances, paid time off and other benefits, plus perks such as cell phones and cars.

The building blocks of a sound compensation plan

Designing and implementing an effective plan typically involves several steps:

  1. Formalize job descriptions. Job descriptions are the foundation on which compensation plans are based. When creating a compensation structure, positions are evaluated based on their contribution to the organization. Therefore, the first step in the process is to ensure job descriptions are updated and accurately reflect the essential functions of the positions.
  2. Evaluate jobs. Only after jobs are evaluated based on their contributions to the organization can a compensation structure be built. Several evaluation methods can be effective; some organizations simply rank the jobs in order of importance. Other companies use a more complex system involving weighted points. For example, certain compensable factors – such as education, relevant experience, error margin and scope of supervision - clearly impact the organization’s success. As jobs are evaluated, these factors are weighted and assigned points. The positions are then ranked in order of their value to the organization and their relationships to one another.
  3. Benchmark key positions. Using local, industry-related and private surveys, market rates are established. Key jobs are plotted against market-rate matches, and other jobs are slotted between the market-rate points. This ensures external competitiveness.
  4. Design a compensation structure. Using the results of the job evaluation and benchmarking, salary ranges are created and positions are slotted within the ranges. Pay strategy, compensation philosophy, intended use of base pay and payroll costs must be considered before finalizing the plan.
  5. Develop a phase-in plan. Once the new compensation structure is in place, decisions must be made for how best to adjust for individuals who may be underpaid or overpaid. This gap analysis must incorporate budget considerations and proposed time frames.
  6. Communicating pay programs in small businesses. This is the one time when it may not be prudent to announce to your employees that a new initiative is being undertaken and that a compensation plan is being developed. Too often if employees learn that the pay program is being looked at, false expectations and tension can develop. Best to remain silent. When the compensation plan is completed, managers can use it as a guide to correct discrepancies over the course of a year.

Conclusion

Small-business owners face an ongoing challenge to offer compensation structures that will attract the people and skills necessary for the venture to thrive. Small companies damage their prospects when they approach compensation in an ad hoc or haphazard manner or allow emotions and pressures to influence decisions regarding compensation.

By taking a proactive, methodical approach to developing a compensation philosophy, considering a wide range of rewards, and crafting an effective compensation structure, smaller organizations can position themselves as employers of choice and lay the foundation for healthy profitability.

 

© HR Works, Inc.

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HR Works, Inc., headquartered at 200 WillowBrook Office Park in Fairport (Rochester), New York, with an office in East Syracuse, is a human resource management outsourcing and consulting firm serving clients throughout the United States. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.