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As an HR leader for your organization, you know that employee compensation is not just something you determine when you hire a new team member and then forget. In fact, how you compensate a team member should reflect their performance and change throughout their journey with your organization.
Whether you’re conducting performance reviews or moving an individual from one position to another, redefining how an employee is compensated is critical, especially if you want to increase employee loyalty and retention. After all, without fair and enticing compensation, people may start to leave. This is currently a big concern for employers as the trend of employees quitting in droves (known as “The Great Resignation”) continues. According to SHRM, November 2021 alone saw 4.5 million workers quit their jobs.
Since 1999, we at Astron Solutions have helped growing organizations, including businesses and nonprofits alike, streamline their HR strategies and better manage employees through ups and downs like the societal shift we’re currently experiencing. We’ve written this guide on employee compensation to help leaders like you do all you can for your own team members and avoid missing any essential gaps during these unprecedented times. Here’s what we’ll be going over:
It’s crucial that your organization’s compensation plan both motivates employees and sets the foundation for their own individual advancement. Without your hardworking staff members, your organization would not be where it is now. If your organization is struggling to create an effective strategy, consider investing in compensation consulting services. Let’s jump right in!
Employee compensation involves all the ways your organization gives back to team members for their hard work. The obvious form of compensation is pay, whether it’s salaried, hourly, or sales-based. It’s important to financially compensate employees fairly, especially in terms of balancing the job role and your organization’s budget.
Employee compensation has many components, giving your HR team additional variables to consider. In this section, we’ll review exactly why creating a dedicated employee compensation strategy is so important, as well as the different forms it might take.
It’s critical that you develop a strong and clear strategy for how employees are compensated for their work with your organization. However, there’s more to it than just ensuring that everyone is fairly compensated.
A fleshed-out and comprehensive compensation strategy should give employees insight into why their contributions are valued and how they align with their job roles. With a clear understanding of what their jobs are, why they’re important, and how much value they bring, employees are further motivated to continue working hard.
Your employee compensation strategy should also create a structure for how employees can grow in their roles and do more for your organization. When those times come, make sure you have a plan in place for how you will reevaluate each employee’s, as well as your overall organization’s, compensation strategy.
In summary, not only does your employee compensation plan provide a concrete and tangible representation of your organization and values, but it also establishes the foundation for overall growth and an improved employee experience.
Coming up with the best way to compensate your employees isn’t just about the numbers. The types of employee compensation are often broken down into the following:
While how you directly compensate team members is certainly important, it’s often found that indirect forms of compensation are the driving factors behind employee engagement, satisfaction, and overall retention.
In fact, it’s highly recommended that your own organization and HR team take a total rewards approach to employee compensation. This approach allows you to incorporate both direct and indirect forms of compensation into a larger strategy designed to both compensate your employees and demonstrate how much you value them. The diagram below shows how both indirect and direct compensation methods can come together in one holistic approach.
The challenge now comes from how to actually measure employee compensation.
As you already know, how you compensate an employee will often change over time. This is especially true with your direct compensation, as each job and role will likely have different pay. Whether you’re advancing an employee or simply moving them to a new role, rethinking their compensation is a necessary process.
It’s easy to think that the best and fairest way to approach direct compensation is to look at the employee’s current performance. However, taking into consideration an employee’s performance rating alone often does not reveal their true market value.
By contrast, taking performance rating in tandem with an employee’s compa-ratio will reveal a fuller picture.
Sometimes referred to as “compensation” or “comparison” ratio, the “compa-ratio” is the percentage obtained by dividing the actual salary (AS) paid to an employee by the midpoint (MP) of their position’s salary range. To find the MP, you might need to do additional research on the job role within the larger industry and calculate the middle of the salary range.
Simply put,
CR (Compa-ratio) = [AS (actual salary) / MP (midpoint of pay range)] X 100
This is a very simple but powerful formula when it comes to deciding how large of a pay raise an employee needs at a given time. This allows an organization to understand how an individual’s pay relates to the organization’s pay ranges and the market. So, if the individual’s compa-ratio comes out to 100%, then the individual is already being paid what a competent performer should be.
To better understand this, let’s walk through an example. Let’s say the market pay range for the average receptionist position is between $35,000 and $52,500 per year, with the midpoint being $43,750 per year.
If there are five actual receptionists who earn (respectively) $37K, $39K, $43K, $45K, and $50K/per year, then the compa-ratios would be as follows:
Here are five clear percentages. The first two compa-ratios are below what a fully competent solid performer should be paid, the middle figure is nearly at midpoint, and the latter two are above the midpoint for the given position.
So how does one use compa-ratios to determine compensation? While pay scales always have a defined range, so too do compa-ratios. As outlined by Australia’s National Remuneration Centre, there are usually five zones of compa-ratio, each associated with a pre-defined level of performance. A commonly accepted range for compa-ratios is 80% to 120%, which divided into 5 zones are:
Each one of these zones is associated with a pre-defined level of performance, with 100% representing fully competent performance in the job. If we use these zones to compare the salaries of the aforementioned five receptionists, Receptionist A would be making a salary comparable to that of an unsatisfactorily-performing employee; B, that of an employee gaining experience; C and D, a fully-competent performer; and E, an excellent performer.
Time spent in a position and pay compression should also be recognized when setting hiring rates or implementing a new or revised pay system. For example, even though Receptionist A’s compa-ratio is low, if they are brand new in the job while Receptionist E has been in the role for 15 years, the pay difference makes sense.
However, if the organization has a true pay-for-performance focus, then compa-ratio is often used to determine the % adjustment, assuming the goal is to move to the midpoint. This would mean that an employee with low compa-ratio and outstanding performance should have their pay accelerated towards the midpoint.
Comparing these five percentages with the actual performance of each receptionist along with the time they’ve been in the role will indicate necessary changes to the individual’s pay. Ideally, an employee’s performance should match the compa-ratio range into which their salary falls.
How you approach your own employee compensation and benefits plan will likely depend on your unique situation and organization. You have to take into account the type of job roles your organization has, your current budget, how your business is doing right now, as well as a number of other factors.
Nonetheless, there are some best practices that any HR leader can learn from. Consider the following when designing your compensation strategy:
As you begin to re-evaluate your employee compensation plan, you need to come up with ways to create a reliable process, not just a one-time fix. This means not only improving your current employee compensation strategy, but also determining how you’ll continue to review and improve it. Only with a long-term strategy in place can your organization start to truly grow and meaningfully engage employees.
Your employee compensation plan is not something you can just come up with on the spot. It takes careful research of your larger industry/field, an in-depth look at your employees and their roles, and consideration of your current organizational standing and budget. That’s where an employee compensation consultant can help.
Dedicated HR consulting firms often help organizations by providing a third-party perspective on their current processes and how to improve them. There are specific compensation consultants with different specialties, so make sure to find one that fits your organization. For instance, nonprofits should seek compensation consultants who understand the unique circumstances and laws associated with nonprofits.
In general, a dedicated compensation consultant should be able to do the following:
If you have questions about compensation consulting services or are even unsure whether consulting is the right move for your organization, reach out to us at Astron Solutions. We’ll be happy to answer any question about this critical but often overlooked strategic element for growing organizations.
Employee compensation is a vital component of the HR strategy of businesses and nonprofits of every size. Make sure you not only develop a strategy that accurately reflects how you appreciate and value your employees’ work, but also grows and evolves as your organization’s goals and priorities do.
Take the time to flesh out your own strategy and even partner with a dedicated compensation consultant to really highlight areas for improvement and then, take action.
To continue your research on how to best compensate and manage employees, we recommend exploring these additional resources:
Employee retention has never been as great a concern for employers as it is today.
Although retaining your talent has always been an important investment of time and resources, the unprecedented external conditions stemming from the COVID-19 pandemic have only amplified the challenges of retaining talent and highlighted the need to look at retention with a critical eye. If you want to improve your organization’s employee retention efforts, knowing how and where to get started is key.
How can you best position your organization to engage and retain employees in 2022 and beyond?
This guide will cover the essentials and our recommended steps for building a well-developed retention strategy.
Table of Contents
Employee retention refers to an organization’s ability to retain its employees over time and minimize employee turnover, whether voluntary or involuntary.
Your employee retention rate, which compares the number of retained employees at the start of a specific time period to how many of those original employees are still there at the end of the period, can be calculated with this formula:
(# of individual employees who remained employed for entire measurement period
# of employees at start of measurement period)
x 100
Calculating the turnover rate will complement the retention rate by showing the percentage of separations in the same period. Turnover rate is often defined as the number of separations divided by the average number of employees during that same time period, and it can be calculated as follows:
(# of separations during the measurement period
average # of employees during the measurement period)
Best practice would be to track on an annual basis your organization’s retention rate and turnover rate, and the reasons behind them, so that you can accurately measure progress as part of your retention plan.
What elements of an organization’s operations contribute to retention? What specific strategies can you use to deepen relationships with employees and reduce turnover? We break them down into five key categories:
Hiring and onboarding practices are your first opportunities to set the tone for your relationships with new employees, so they play an immediate role in driving retention.
There is much discussion around the role of compensation in shaping the employer-employee relationship and impacting retention. While intangibles like your culture, management philosophy, and an immediate supervisor’s management style have an increasingly large impact on retention, compensation and benefits still also play important roles.
A high percentage of employees report feeling dissatisfied with the development opportunities offered by their employers, but learning and development, engagement, and recognition are critically important for long-term retention.
Your organization’s culture and the workplace environment you foster can play major roles in employee engagement, well-being, and ultimately retention.
How your organization structures its teams and manages employees can also directly impact its ability to retain talent. These elements should be periodically reviewed to ensure they are still delivering maximum value for the organization and employees.
To begin strategically improving your employee retention rate, we recommend following these core steps:
There are a number of reasons why employee retention should be a priority for your organization. An effective retention strategy will result in:
It is difficult to ignore the massive impacts of what has been termed the “Great Resignation” on employee retention. This unprecedented surge in voluntary turnover is reshaping the U.S. labor landscape. A record 4.3 million Americans quit their jobs in August of 2021, followed by 4.4 million in September.
The pandemic’s immediate effects have in part catalyzed this turnover increase. However, it is crucial to note that the Great Resignation seems to be driven by a complex mix of economic, social, political, and demographic forces, not all of which are directly attributable to the pandemic:
Additionally, the Employee Retention Tax Credit that was instituted to help struggling businesses retain employees in 2020, has ended earlier than expected with the passage of the Infrastructure Investment and Jobs Act. Organizations taking advantage of this credit may now face additional challenges making up for the lost support.
Clearly, the Great Resignation is complex. The factors listed above mean that retaining employees is more important than ever before for the immediate and long-term health of organizations today.
Want to take a deeper dive? How can organizations respond to the Great Resignation? What actions can HR leaders take to more effectively manage change in a turbulent environment? Jill Krumholz, Co-Owner and Managing Director here at RealHR Solutions, discusses the topic with our friends Jennifer Loftus of Astron Solutions and Ken Cerini of Cerini & Associates in this free webinar:
Employee retention is driven by a complex range of factors but has never been as important for organizations, in all sectors and of all sizes, as it is today. Understanding these factors, the current labor landscape, and how it all comes into play in the unique context of your own organization are important and also can be very challenging.
HR experts can be invaluable partners as you work to improve your employee retention rate. RealHR Solutions is a leading provider of HR consultation and outsourced services. Our experience spans a wide set of HR practices that impact retention, including recruitment, employee coaching, compensation and benefits planning, and more. We can help your organization develop a comprehensive retention plan of action or dig deeper into the specific areas that need improvement through benchmarking and HR assessments.
Get in touch today to discuss your organization’s retention goals and needs. We will be happy to help!
And to learn more about driving results for your business through strategic internal improvements, keep exploring with these resources:
Pay Equity Audit: Results and Implementation
Response to the Great Resignation
Employee Coaching: Complete Overview and How-To Guide