Your people are your biggest investment. Clay Johnson, our Director of Total Rewards Consulting, answers pressing questions in the total rewards space.
In this article, he covers a myriad of best practices related to job evaluations, compensation, benchmarking, and beyond.
Have your own total rewards question? Submit it in the form at the bottom of the page and Clay will answer your question in a future article.
Alright, let’s dive in!
Compensation Philosophy
Q: What are the key factors to consider when developing or updating your compensation philosophy?
A: As the starting point of developing a compensation philosophy, think of it as a set of commitments to your employees. It helps them understand what they can expect from you regarding compensation:
- How will my pay compare to similar roles in our relevant labor market?
- How often will my pay be reviewed?
- What processes, data, and structures does my company use to ensure equitable and competitive pay?
- What can I do to increase my compensation over time?
This mindset will help you articulate a more complete and purposeful philosophy.
Market Pricing & Benchmarking
Q: How do you ensure the reliability and validity of your market pricing data?
A: Match your jobs correctly. It might be tempting to take a shortcut and match by job title only. Don’t make this mistake.
Matching by job title alone leads to apples-to-oranges comparisons, providing little value to your benchmarking outcomes. There’s a real ROI on the time spent to properly match based on job content.
Q: What are the key factors to consider when benchmarking your compensation against the market?
A: Market data, regardless of your source(s), is an imperfect representation of the market. It’s a sample. A snapshot in time. A common mistake I see clients make is to use the market data as-is, without carefully considering how the market data fits within their existing compensation and job structures.
Is market data critical to an effective comp strategy? Absolutely. But it’s inherently flawed and needs to be polished. Carefully review and adjust the data in the context of your established job families, career paths, promotion and merit practices, internal equity, etc.
Q: How do you know whether your market pricing data is sufficient?
A: Ideally, use three or more sources of data for each benchmark job. Why? It provides stability and confidence in the accuracy of your market information.
Consider this comparison: Imagine a stool with one leg. How stable would it be? Not very. What about a stool with two legs? Better. But I still wouldn’t be comfortable sitting on it. How about a stool with three (or more) legs? Now the stool is stable. I can sit with confidence.
Similarly, using at least three data sources provides the ability to confidently triangulate a job’s value in the market.
Q: How do you handle market data gaps or outliers for niche or emerging jobs?
A: Handle gaps and outliers— This is where having an internal job worth hierarchy will come in handy. With the proliferation of emerging jobs and highly specialized jobs, it’s likely that an organization will have market data gaps.
A job worth hierarchy provides a framework of where each job fits relative to all other jobs and enables you to approximate a job’s value based on the jobs above and below it in the hierarchy.
Job Evaluation
Q: How do you involve stakeholders and get buy-in for your job evaluation method?
A: Identify your stakeholders. When identifying stakeholders, it’s important to avoid “too many cooks in the kitchen.” In tandem with an ultimate decision-maker (e.g., CEO or CHRO), identify a hand-picked group of individuals who can meaningfully contribute to the job evaluation process. Ideally, that includes individuals at different levels (senior leader, manager) and with different perspectives (HR, finance, business unit).
A small, focused group with complementary perspectives can help provide a well-rounded outcome. Just don’t forget to identify the ultimate decision-maker at the outset!
Q: How do you update and maintain your job evaluation system over time?
A: It’s helpful to consider the end from the beginning when it comes to communicating job evaluation methods and processes.
Methods like market pricing are simple for non-technical employees (i.e., non-compensation people) to grasp, whereas methods like point factor or job component methods are difficult to perform, explain, and understand.
When employees can understand the method, they’re more likely to trust it.
Compensation Design
Q: What are the advantages and disadvantages of using market-based pay versus job-based pay?
A: “Market-based” or “job-based” is a false dichotomy. In reality, most compensation practitioners recommend a hybrid approach that leverages the strengths and augments the weaknesses of either approach.
In today’s market, employers need to be plugged into the market while also ensuring their pay practices align with their organization’s goals and pay philosophy. A hybrid approach helps you balance internal job worth with external competitiveness.
Q: What are the pros and cons of using salary bands versus pay ranges?
A: Every approach has its drawbacks. With a project as important and complex as compensation structures, one can easily become paralyzed by the options.
Don’t let perfection become the enemy of good and stand in the way of progress. Remember that compensation structures will evolve and change with the business over time anyway, so your decision on which approach to take is not terminal.
Do some due diligence: decide, build, implement, assess, and revise as you learn and grow. You got this!
Q: How do you adapt your compensation approach to different employee groups and locations?
A: It’s helpful to consider that some of the categories most helpful in compensation program design are not necessarily the obvious ones.
For example, consider a privately held company whose compensation strategy includes equity (stock options) as a potential mode of compensation. In this instance, it may be helpful to consider a category of financial risk tolerance. Employees with a greater tolerance for risk are more likely to value, be motivated by, and purchase stock options, whereas employees with low risk tolerance are more likely to value cash compensation instead.
Thinking along these lines will help you design compensation programs that appeal to all groups.
Communication
Q: What are the common compensation communication pitfalls and how to avoid them?
A: When designing effective communication, don’t forget the “motivational relevance” phenomenon, which suggests people tend to learn/retain info better when they have a personal interest in the topic. (Or, conversely, don’t learn/retain it in its absence.)
This principle can help us identify the most effective times to communicate/discuss/train on compensation topics, like during the offer process, new hire orientation, before/during/after a merit cycle or bonus payout, during tax season, etc.
The key is to tell them when they are ready to hear it, not just when it’s convenient for you to tell them.
Q: How do you address employee dissatisfaction with benefits packages?
A: Educate and engage. I’ve been surprised by how often employee dissatisfaction is actually unfounded and stems from a lack of knowledge of benefits that are already available. The full scope of a benefits package–in all its detail–is both broad and deep, and it’s easy for employees to be unaware of everything that’s available to them.
Ongoing education (not just during Open Enrollment) is needed to minimize gaps in knowledge and to maximize the value of your benefits investment.
Q: What are the key compensation and benefits metrics that you track and report on?
A: Total Compensation — I can’t emphasize this point enough: You could offer the richest comp and benefits imaginable, but it won’t mean anything unless employees can actually see and understand the full picture.
Total compensation (total rewards) statements are probably the most impactful tool in influencing employees’ perceptions of your employee value proposition. Combine that with some training around your compensation philosophy, and you’ll really be crushing it!
Don’t leave value on the table; be intentionally clear with your value proposition.
Compensation Administration
Q: What are the current best practices for setting vesting schedules for equity awards?
A: I’ve noticed more companies moving to shorter vesting periods. While the “4-yr vest with a 1-yr cliff” still seems to be the standard, more companies are offering equity grants with 3-yr, 2-yr, or even 1-yr vesting schedules.
Of course, each company needs to select the vesting schedule length and type (e.g., time-based, performance-based) that fits best with their compensation philosophy, equity program, and organization goals.
Don’t jump on the bus before you know where it will take you.
Q: How do you handle salary compression or overlap issues?
A: How to resolve salary band compression and overlap? When budgets are tight, it may not be financially viable to resolve all known compression (or inversion) issues at once. That’s okay because not all compression is of equal concern.
I recommend taking a “risk reduction” approach: review all your compression issues and identify which represent the greatest risk of turnover and/or employee engagement issues.
- Which roles would be hardest to backfill?
- Which would cause the greatest disruption to the business and teammates?
- Which are relatively easy to backfill?
- Which roles have redundancies that can absorb the work?
Asking these types of questions can help you use limited funds to resolve compression in a prioritized order.
Q: How do you motivate and retain high performers with merit pay?
A: A common complaint is that the typical 3-5% merit budget doesn’t allow for differentiation. This defeatist view results in the peanut-butter approach of spreading the budget out evenly— an approach that likely does more harm than good. It over-rewards low performers and under-rewards your high performers, resulting in misplaced investment and a high risk for regrettable turnover.
Differentiation requires clarity in performance indicators and commitment to meritocracy, which leads to honest conversations with low performers and enhanced retention among top performers.
With some planning and discipline, you can ensure a wise investment of your limited merit budget.
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CLAY JOHNSON, CCP, SHRM-SCP
DIRECTOR, TOTAL REWARDS CONSULTING
