Compensation Strategies that Leave No Good Employee Behind
By: John Rossheim
Is now the time for employers to revisit their compensation strategies?
For many companies, profits are up — thanks in part to labor-market conditions have allowed for relatively low pay increases in the 2010s. So why should employers start worrying about whether their employees feel fairly compensated?
For one, employees increasingly are feeling the power to vote with their feet. In February 2015, just over 2.17 million American workers quit their jobs — that’s 200,000 more than gave notice in the same month a year earlier, according to a Bureau of Labor Statistics report.
So whether your company is most concerned with employee retention, or employee productivity, or internal pay equity, 2015 is a good time to revisit compensation strategies and structures. Here are some top considerations on why you should regularly revisit your employee compensation structure.
You get the performance that you pay for. Companies should recognize that employee motivation is something that money often can buy. Workers appreciate the economic value of a more-than-minimal raise — and what it says about the employer's bottom-line recognition of job performance.
“The performance the employer wants isn’t going to be sufficiently motivated by a modest pay increase," say E. James Brennan, a compensation consultant in Bellingham, Wash.
Avoid pay policies that engender zombie employees. Year after year of meagre increases can cause employees to check out, emotionally.
"You don’t want these folks to stay but die on the job, or to have them discount their productivity in proportion to the perceived pay gap," says Brennan. "This really happens." Think of the cost of a substantial raise as an investment in productivity.
Pay them or lose them. While most employers will keep average salary increases in the 3 percent range or less in 2015 according to a consensus of compensation surveys, they should recognize that talent is considerably more mobile than it was just three or four years ago.
"For middle managers, you might see 2 percent raises and minimal bonuses, and their bosses will say nice things about what they’re doing," says Peter Cohan, a management consultant and instructor at Babson College in Wellesley, Mass. "But if the people are any good, they’ll probably just leave and take jobs elsewhere at much higher pay."
Reconcile external and internal pay. Beware of bringing in talent comparable to your incumbent managers at significantly higher pay. "Once you find out what the market entry pay rate is for your hiring pool, you have to think about what will be the impact when you put this new hire in the pool where incumbents are making less," says Brennan.
"Companies generally take care to make sure they don’t leapfrog new people over senior incumbents," says Brennan. "Internal pay equity can overrule or modify what an external offer will be."
Well-informed employees are more satisfied with their pay. If you believe in the integrity of your compensation structure, you should be able to discuss it with your workers in some detail.
"When pay for performance is done well, employees understand more about the compensation process," says Stephanie Thomas, a research associate at the Institute for Compensation Studies at Cornell University. "Employees are less likely to feel that differences are unfair if they’ve been told how it works."
Millennials may not keep their pay a secret. "Younger employees will talk about their pay," says Thomas. "So with them, internal pay equity will create both opportunity and challenge."
Among the opportunities: to have an open conversation about what aspects of employee performance earn financial rewards.
Among the challenges: miffed employees who don't see eye to eye with their supervisors on how they have performed against goals that come with financial incentives attached.
Close the deal with a signing bonus? Not so much. If your best candidate or her headhunter asks for a signing bonus, consider counteroffering with a performance-based bonus payable a few months out if goals are met. And offer the same incentive to everyone in the new hire's cohort.
Signing bonuses can alienate incumbent employees who have stayed with the company through recent years of scant pay increases.
Show me more than just the money. Demonstrate to your employees that you value them with all kinds of rewards, from cash to intangibles.
"Reinforcements for performance, respect from peers, intellectual and emotional challenges, engagement with the mission — these are all elements of total rewards," says Brennan. "People don’t work for money alone."
Mind any race or gender gaps. The diverse workplace of the 21st century is no place for demographic biases in pay, which often are illegal.
"How much proactive work are employers doing to remedy gender and race pay gaps? Not enough," says Thomas. "In the years right after the financial crisis, budgets were so strained that pay equity was given lower priority."