Do You Have A Compensation Strategy?

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New transparency laws are prompting some to take a multi-year look at all employee roles, led by HR but bringing in legal and finance as well.

Employees are becoming more aware of pay ranges for their jobs, and it’s putting HR leaders in a tough position. Offer too much to a new hire and you risk losing current talent. Offer too little, and you can’t attract new hires.

“This balance is one of the more difficult challenges HR professionals face today,” says Jenn McCabe, a partner in the Los Angeles office of accounting and consulting firm Armanino.

McCabe spoke with StrategicCHRO360 about how a compensation strategy—not just a comp analysis—can help, what it entails, and the plusses and minuses of new transparency laws.

Can you explain the recent legislation about publishing pay scales, how that is impacting HR’s job?

The recent legislation around publishing pay scales has thrown a wrench into some HR and hiring managers hiring and compensation plans. In 2023, we’ve seen several states enact pay range laws that require employers to publish a pay range for any given job.

While these laws currently apply on a state-by-state basis, many employers hiring remote workers need to ensure they comply with these laws if they plan to hire workers in the states where pay transparency laws apply. California, Washington and Rhode Island are states with active pay transparency laws.

Publishing pay scales is a long-term strategic part of HR’s role and can be a valuable asset for demonstrating what companies bring to the table—whether it’s a high market value of compensation or an emphasis on non-monetary compensation through benefits.

What it has certainly caused is for firms to revisit their pay structures to ensure they are both competitive on a salary basis, as well as review the benefits they offer. If you know your base compensation offering is on the lower end of the scale, you may need to make up for that through stronger benefits to attract potential employees.

For the broader labor market, one benefit that publishing pay scales can offer is that it can reduce or eliminate pay discrimination. This has leveled the playing field for race and gender pay disparity. However, publishing pay scales can also have a negative impact on retention of existing employees, particularly for high performers. High performers have become aware they may not be compensated for their increased performance and productivity and HR management must be able to accommodate these employees.

HR managers have been forced to become even more agile to ensure that they are offering competitive salaries, keeping existing, high-performer employees happy with their compensation and planning for the many uncertainties the labor market is throwing at companies.

Because the pay ranges are so closely scrutinized now, you have to have a solid strategy for the long-term hiring needs of a firm otherwise you risk shooting yourself in the foot by upsetting current employees or pushing away new hires. This balance is one of the more difficult challenges HR professionals face today.

What is the difference between a compensation strategy and a compensation analysis?

A compensation analysis is a point-in-time exercise that should be done at least twice a year or more in today’s fast-changing environment. The analysis cannot be done solely by an HR department, but a well-qualified HR professional should be able to oversee the analysis assessment.

Typically an analysis should require a survey of the broader landscape to review what competitors pay for similar positions or departments you are analyzing for. HR can work with the financial department to address factors like tenure, education level and geographic location to produce a pivot table for pay ranges. This information must be recent to determine if it’s in range to the market as things change constantly. From there you can make adjustments to existing salaries and job posting salary ranges to ensure you remain competitive based on your needs.

Compensation strategy needs to be looked at over a multi-year basis. Think of building a compensation strategy to address a specific goal of the overarching business. Take reducing turnover to achieve longer-tenured employees as an example. HR would need to have a multi-year compensation strategy for every department across the career trajectory of an employee.

If you bring in an entry level employee that you see long-term potential in, you’ll need to be prepared to compensate for their growth over several years to incentivize them to remain with the company, the planning for this should be done in advance and not on a whim as employees perform well or poorly.

Many employees may not want to leave a company, but if the projected salary growth isn’t clear, they may think it best to make a job switch to nab a better salary. A forward-looking compensation strategy can address this by setting goals and expectations for both entry and higher-end level talent to help reduce turnover. 

What are some factors to consider when developing a compensation strategy?

When building a compensation strategy, HR needs to work closely with finance and legal to understand what is possible for compensation for each role, how that strategy might align with benefits and the overall performance of the organization. This should be readjusted every year and cannot remain evergreen, such as in an offer letter. HR needs to factor in the legal perspective—especially if an equity package is included in the employee’s compensation.

HR professionals should consider compensation for employees both at the bottom and top of the market. We’re seeing more often now that high performers or more senior employees make a reasonable salary, but it is not necessarily at the top of the salary range given how quickly and competitive wages have moved.

So, HR needs to work to determine variable compensation based on cost and risk and translate that into a benefit package based on performance. Essentially, this boils down to keeping current and high performing employees happy while addressing the changing needs and demands of new hires, especially at more senior positions.

For entry level employees, converting interns into long term employees can be advantageous, but you will need to have a strategy in place that incentivizes them to remain loyal to the company through goal setting and an accessible path to a higher position and compensation.

How does a company’s compensation strategy align with its overall business strategy?

A company’s compensation strategy should be purposefully crafted to benefit the overall business and its goals. Here are some potential scenarios and questions to consider:

Do you want to bring more employees back into the office? Benefits need to reflect the lack of work-from-home flexibility. Do you have an aggressive growth plan with a sale or IPO on the horizon? Do you have a rock-solid equity incentive program for high performers and senior team members? Do you have a talent gap in the middle-manager positions? Do training and development line up with the salary of this level to help with employee retention?

On the flip side, perhaps the business objectives and compensation strategy are focused on targeting low compensation but offer clear development opportunities. This allows the business to maintain the workforce at lower compensation levels at the cost of increased, but anticipated, turnover.

Regardless of the goals, the compensation strategy plays a vital role in allowing any business to maintain the right talent at the right salary to achieve their desired outcome.

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