The Money Tree: Understanding & Implementing Compensation Analysis

Austin Baker Business Psychology Thursday, August 01, 2019


As HR embraces the promise of data-driven decision-making, compensation and benefits functions are becoming more strategic, compliance-oriented, and data-centric. With low unemployment, acute talent shortages across industries, and an increasingly complex economic environment, the stakes have never been higher for compensation management programs. From attracting great talent to improving engagement and retention, compensation plays a central role in business success.

Compensation analytics have emerged as a new discipline built on the foundations of HR analytics, that focuses on optimizing the cost of a workforce to drive bottom line growth. This branch of analytics helps organizations craft an employer brand that effectively communicates a winning employee value proposition. A value proposition that includes both financial and non-financial rewards. In effect, compensation analytics enables HR leaders to reward high-performers adequately, to boost workplace morale, engagement, and retention.

Perhaps you are starting a new business or organization, and you’re hiring your first employees. Maybe you are expanding operations and adding on new positions. Or you might have noticed that you’ve lost a few good employees to other companies that pay more than you do.

In any case if you manage people, you want to pay them fairly, and that means that you need to employ good compensation management practices. One of the best places to start is with compensation benchmarking.

Understanding Compensation Management and Benchmarking:
Compensation management is a critical part of talent management and employee retention. It uses financial and total rewards to attract recruits, reduce turnover, spur performance, and boost employee engagement. It is responsible for ensuring that salary and bonuses remain competitive and benefit programs change with the needs of the workforce. The people in this role not only work with data, but are also keen to understanding the complexity of total rewards administration.

Compensation benchmarking is the process employers use to determine the market rate for each position within their organization. Someone–usually an HR manager charged with compensation management–looks at all of the organization’s job descriptions, then finds jobs in other companies with similar responsibilities to compare and contrast wage rates. That data along with a multitude of compensation resources are used to deliver a market rate for certain positions.

There are several factors that the compensation analyst will consider when deciding a salary benchmark:

1. The job responsibilities for each position: This is one of the most important pieces of data to factor into a compensation management report. Employees should expect equal pay for equal work. If you work for Company A and you employ people who are responsible for making 100 widgets per day, you should be paying them around the same as people making the same number of widgets in Companies B and C.

2. Geographic location: The location of the job is also important to consider. In some states, employers pay more than in other parts of the country. Sometimes the difference is based on the area’s cost of living. In other cases, local demand for a particular type of work changes the market value for the job. For instance, a public relations manager in Maine, where the cost of living is around the national average, can expect to earn about $88,380 per year. But in Washington, DC–where the cost of living is very high and thousands of lobbyists are in the market for good PR–this same job earns $170,750.

3. Education level: In general, jobs that require higher levels of education pay more than jobs that don’t. But there is also a difference in salary between people with similar job responsibilities at different levels of education.

4. Years of experience: Employees with more seniority at an organization often earn a higher salary than new employees. This is because it’s typical for them to receive a pay raise every year. But even if a person has spent years working at another similar company, having that experience can boost that person’s salary as they’ve had more time to practice and hone their skills or expertise. Determine the job’s internal value to your organization.

5. Determine the job’s internal value to your organization: A job’s internal value is typically based on skills or competencies, and the overall perceived value of contribution the job provides to an organization. Jobs with greater or direct internal impact and contribution to your organization’s strategy and business objectives are more valuable and generally paid more than jobs without the same business impact and contribution to organizational goals and objectives.

Several methods can be used to slot jobs into career levels or bands that represent internal value. Positions with similar internal value are generally, but not always, aligned from a competitive external pay standpoint. It’s important to analyze the relationships and make certain that where alignment does not exist it is explainable, legal and defensible.

6. Consider organizational factors, including budget: Evaluate your budget considerations or constraints and what you paid the last incumbent. Determine the pay mix (proportion of compensation delivered in base salary versus bonus versus other forms of pay) and adjust the base salary as required to reflect a pay mix that differs from the market or that is reflective of your compensation strategy. Be certain to consider individual job experience or any other unique factors when finalizing the compensation package.

Recognize that pay is only part of the total reward package. Don’t forget to factor into your pay decision other attractive benefits you provide such as flexible work schedules, engaging career opportunities, fulfilling work, recognition programs, generous time off or health insurance, and retirement benefits.

A good compensation analyst will look at all these data and analyze them to come up with an accurate portrayal of the market rate for a particular job, both in salary and non-monetary benefits.
Many organizations struggle to set salaries in the ‘sweet spot' of being neither too low to attract top talent, nor too high to attract unwanted attention from the IRS, or worse, the media. Professional compensation consulting can result in significant benefits for the organization, such as:

• Increases employee job performance
• Enhances team and individual focus
• Provides clearer metrics and compensation data
• Creates a constant sales process refinement
• Optimizes sales weakness management
• Clears communications and understanding for any compensation changes
• Amplifies recruiting efforts
• Engages workers through pay incentives
• Increases sales revenue
• Creates an efficient compensation distribution

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