Fair Compensation Best Practices For Beginners [+Template]
When it comes to fair compensation for employees, you can’t wing it and hope for the best. Your employees will inevitably discuss their pay with others, start doing their own research, or get offers from other companies, and they won’t be happy if they find out you’ve been playing a guessing game with their salary rather than having a clear and fair compensation strategy. In fact, in a PayScale survey, 25 percent of people said higher pay was the primary reason they sought employment outside their current organization.
“Often when businesses are creating or reviewing their compensation structure for fairness and equity, they seek outside support from a specialist like a consulting firm,” says Karlan Evans, director of HR at Xactware Solutions, Inc. “A consulting firm can help you pinpoint information on fair salaries and set benchmark data. But, if you’re a small or medium-sized business, the fees for a consulting firm are likely not in the budget.” That doesn’t mean you can’t create a fair compensation structure, but it does mean you’re going to have to work a bit harder to piece together information with available resources.
A fair compensation strategy will be fair for both your employees and your organization. Here are a few tips and ideas as you set up your compensation plan to make sure your employees don’t pack up for new jobs.
What Is Fair Compensation?
In elementary school, fair means equal. Everyone gets the same thing in the same amounts so no one can complain. But, as with most things, fair gets more complicated once you transition from kindergarten playgrounds to adult workspaces. Fair compensation does not mean everyone at the company is paid the same amount. Rather, fair compensation is paying employees an appropriate amount according to their performance, experience, and job requirements.
Some companies have attempted an across-the-board equal pay strategy—spoiler alert, it didn’t work. Harvard Business Review reported one story of a company that decided to pay every employee from the CEO down the same base salary of 70,000 dollars. This led many of the highly skilled employees at the company to feel undervalued as they saw lesser skilled peers gain a huge bump in pay, while theirs remained relatively the same. As a result, the company lost many of their top performers because it chose equal pay over recognizing individual contributions to the business.
You’ll want to create an overall compensation plan for your company, but there should be room in it for paying employees according to their contributions rather than making blanket decisions on pay bases, raises, or bonuses.
Developing a Fair Compensation Plan
Having a clear compensation plan helps you decide the best use for your compensation funds. In the BambooHR Definitive Guide to Creating a Compensation Plan, we lay out five essential steps for building a successful and fair compensation plan in your organization.
Step 1: Gain Executive Support
As an HR representative, you’ll need to get your executive team on board with creating or updating your compensation plan. Generally, this is as simple as helping executives understand that if employees aren’t getting paid what they’re worth, they will look for jobs elsewhere. Keeping top talent engaged and happy should be a priority for every organization.
Step 2: Define Your Compensation Strategy
This will mostly come down to how competitive you want your base pay to be with the market value of a position and how you want to determine raises. Ask yourself how performance, skill, and job function will tie into establishing these.
Step 3: Develop a Market-Based Approach to Pay
We’ll discuss gathering market data below. As a small or medium-sized business, this can be tricky, but we’ll point you in the right direction.
Step 4: Build Pay Ranges
Pay grades are a very common way of establishing pay ranges. In this model, each position is assigned a pay grade based on the level of responsibilities required to perform that role, the amount of authority someone in that role has, and the length of time an employee has performed that role. If you aren’t already familiar with a pay grading model, you might be feeling confused right about now. To better understand these, check out the Definitive Guide to Creating a Compensation Plan. We’ll also cover more details on pay ranges in our next section on gathering market data.
Step 5: Implement Your Plan
This will include communicating your plan with employees and training managers so they can have productive compensation conversations with each other.
Gathering Market Data
You will want wage information from your market which is other employers who are trying to hire employees of the same type and caliber, taking into account your industry, company size, and location. Our HR expert Evans named gathering market data as the number one pain point for small and medium-sized businesses to establish fair compensation for employees. But she explains that “without the funding to go to a consultant or expert, you can still find well-priced options like PayScale or Salary.com where you can access benchmark data and create your own structure based on what they provide.”
You can use market information you find from one of these platforms to figure out fair compensation for an employee. For each job, you will have a range with a minimum (the minimum amount you would need to offer to hire an employee in this role), a median (the amount you expect to pay most employees in this role), and a maximum (the most you would be willing to or able to pay an employee in this role). “Pick the market median and build off of that,” says Evans. “This will help you figure out a higher and lower end of the scale and apply a grading structure.”
How to Apply Market Data to Determine Pay: An Example
For example, according to the PayScale salary calculator, an HR generalist in Orlando, FL makes between 36,000 and 59,000 dollars a year, and the median is 46,000 dollars a year. If you are an Orlando-based employer preparing to hire an HR generalist, you could set your median pay at the market value of 46,000 dollars a year for whoever you hire. If you need an absolute rockstar HR person with quite a bit of experience, you might shoot for higher in this range and offer 55,000 dollars. It costs your company more, but someone with years of experience will also be bringing more to the table than your average HR generalist. Plus an employee with years of experience generally knows their worth and won’t be attracted to a position that underpays them for this skills and experience. Higher pay can help attract and snag more qualified candidates.
While these tools will require a fee, they are still less than paying for an outside consulting firm. And considering how much it costs to refill a position when employees leave, it may save you money in the long run. Employees don’t tend to stick around if they’re underpaid.
Don’t forget market data changes frequently, so reviewing your compensation structure and performing a market analysis won’t be a one and done thing. Most HR specialists, Evans included, suggest you do a market analysis at least once a year. You’ll have to make frequent salary or pay grading adjustments based on the fluctuating market.
Pay Raises and Promotions
Regularly assessing market values will help you when it comes time for yearly salary adjustments (yay for pay raises!) or when you are ready to promote an employee. “It’s good to have standard guidelines across the company,” says Evans, “but then beneath those blanket guidelines, you may have specific and different benchmarks within teams, divisions, and departments.”
For example, an HR department and a sales department are going to have very different benchmarks because an HR team member often doesn’t have quite as quantifiable goals as someone in sales. To ensure that you offer fair compensation and opportunities for pay increases across the organization, Evans advises having teams tie their goals and benchmarks to organizational values. This makes less quantifiable contributions more visible and keeps the entire company on the same path.
So we’ve talked about compensation fairness not being about strict equality. But what about pay equity? Pay equity is “compensating employees the same when they perform the same or similar job duties, while accounting for other factors, such as their experience level, job performance, and tenure with the employer,” according to the Society for Human Resource Management (SHRM).
Pay equity on the basis of sex is legally required by the Equal Pay Act, and many states have additional laws that include race and other protected characteristics. You should research all pay equity laws required by your state, but regardless, it is best business and moral practice to provide equitable compensation for employees regardless of sex, race, etc.
Like we stated previously, paying employees equally doesn’t mean everyone gets paid the same thing. There will be circumstances where an employee has the same job title as another but is paid more because they have additional experience or expertise.
“Be transparent about how the business is doing and transparent with employees about how they are performing—especially if you are tying pay to performance.”
To keep your compensation fair overall, you will need to conduct pay equity reviews in addition to annual market reviews. This will keep you compliant and will prevent discrimination against certain employees.
Communicating Pay to Employees
While you don’t need to be completely transparent about pay, you should communicate your pay structure to employees. It’s up to you how much you want to share with employees, but at least assuring them that you have a fair compensation plan in place can help put workers at ease. “Even if you don’t want to tell employees their salary range, be transparent about how the business is doing and transparent with employees about how they are performing—especially if you are tying pay to performance,” says Evans.
Overall, be consistent with your fair compensation and with your communication. This will give people a clear understanding of where they are now and where they have potential to go.