Begin with Compensation Research
For organizations looking to hire new employees and grow their workforce, this starts with a clear understanding of their current talent needs and their expected financial resources. Identifying these in advance helps your organization develop job responsibilities, determine how much to pay employees in direct compensation and benefits, and know how fast your organization can afford to grow.
A well-aligned compensation and benefits plan takes the following factors into account when calculating compensation:
- Federal and Local Laws: To avoid legal issues, your compensation plan needs to meet minimum wage requirements, pay equally for equal work according to the Equal Pay Act, and meet all the terms of the Equal Opportunity Act.
- Standard of Living: How much does it cost to live in the regions where your employees live? Researching the figures for the average salary and median rent price can help you determine if the compensation you provide employees will meet their local standard of living.
- Industry Norms: It’s important to research compensation not just by job title but also by industry. While two employees may have the same job title, their job functions may be very different if they work in two different industries—the manager of a factory floor will have different challenges than the manager for a sales team, for example.
- Local Competition: While national employment trends have some effect on local compensation, local trends determine which positions or skills are in high demand. One local example for BambooHR—software developers are in high demand in Utah’s up-and-coming Silicon Slopes tech sector. It’s important to know which positions are competitive and to keep your finger on the pulse of that competition.
Once you’ve determined acceptable amounts for your organization to provide for each position’s compensation and benefits, the next step is to determine the employment terms employees need to follow to earn it.
An hourly wage is compensation that employees earn for working for a period of time, generally measured in hours. Most hourly employees perform manual or location-based labor. Examples of hourly workers include retail workers at a store’s location, manufacturing operators on an assembly line, and medical personnel in a hospital. In the United States, the Fair Labor Standards Act (FLSA) defines a full workweek as 40 hours. If an employee works more than this, the extra time is paid out as overtime pay at an increased wage, commonly known as time-and-a-half.
Planning out compensation for hourly employees
Overtime laws make it costly to overwork hourly employees. But hiring too many employees can also put a strain on an organization’s budget, especially when factoring in the cost of compensation and benefits.
Part-time employees often provide a solution when additional employee contribution is needed, but won’t produce the return on investment to justify the cost of a full benefits package. Because part-time employees are contracted for fewer hours, they can help cover busy periods of the week, such as retail spaces on weekends. A part-time arrangement could also enable caregivers or older employees to continue to work in an arrangement that matches their other responsibilities and goals.
Outside of what is required by laws such as the Affordable Care Act (ACA), employers have broad leeway on benefits packages for part-time employees, leaving them free to offer full benefits, partial benefits, or no benefits.
Exempt employees are excluded from overtime regulations under the FLSA and are commonly referred to as salaried employees. They are paid for the tasks they perform, as these typically knowledge-based tasks are difficult to track on an hour-by-hour basis. In addition, exempt employees must exercise independent judgement for more than 50 percent of their workday. These broad categories cover much of what is termed “knowledge work.”
Because the FLSA only limits working hours for non-exempt employees, organizations have no legal reason to discourage exempt employees from working long hours. As a result, many salaried employees work far more than 40 hours each workweek to complete their duties or simply as a display of their dedication.
Getting more working hours from employees doesn’t always mean getting more for your money, though—long working hours can take a toll on an organization’s employee engagement, job satisfaction, and retention rate as employees burn out. An effective company culture will balance employee needs and desired outcomes when setting performance expectations, enjoying the benefits of employee growth rather than experiencing the costs of employee replacement.
Commissions, Bonuses, Tips, and Other Performance-Based Compensation
Many organizations tie certain employees’ compensation to their individual performance or the success of the organization over time. Commissions and tips are the most common examples of this performance-based income, many times supplementing a smaller wage. Along with the FLSA, several states have passed laws to regulate compensation for tipped employees.
Many organizations also offer employees profit sharing and investment shares, providing an additional incentive to help the organization succeed.
In spite of bonuses and incentives being additions to base compensation, employees tend to view indirect compensation as they would regular compensation—a means to support their standard of living. If you plan on offering rewards and recognition to increase employee engagement, your employees need to feel that their current performance-based compensation supports their needs. Otherwise, you risk turning encouragement into an unintentional threat.
Certain companies may also offer non-monetary incentives, such as a company car or cell phone, catered office lunches, or nap pods. These incentives remove costs from an employee and strengthen the connection between employee and company.
In any employment contract, long-term success depends on aligning the needs of the employee and the employer and ensuring that alignment continues as both employee and employer grow and change. Optimizing compensation amounts, types, and schedules is vital for this process.