*This article originally appeared on Payscale.
PayScale’s 2017 Compensation Best Practices Report (CBPR) found that just 37 per cent of organizations have a defined compensation strategy.
Here are five steps you can take to develop one so you can start being more intentional with your comp spend.
1. Start by thinking about your organization’s culture, business, and HR strategy.
Your culture is who you are as an organization and consists of the values and behaviors that collectively determine how and why your organization operates the way it does. Every organization has a reason for existing — what you’re trying to do — and the business strategy is the roadmap leaders develop to help you get there (through the achievement of a specific mission or business goals). And since you’ll need people to make all this happen, the HR strategy is your plan to attract, motivate, and retain the right employees at the right time to achieve your organizational goals.
All these factors taken together should inform your compensation strategy.
2. Consider what you want to reward.
Circling back to your company culture, drill down on what kind of behavior you want to reward with pay increases. Are you focused on performance to the point where top performers get bigger raises? (Performance was the number one reason for raises in 2016, according to the 2017 CBPR.) Or is loyalty a big part of who you are and thus rewarding tenure is important? Are there certifications or special skills you prize so much that incentivizing employees to obtain them is part of your culture? Or do you plan to reward some combination of these things?
Whatever the case may be, make sure everyone involved in making pay decisions knows what you intend to reward.
3. Look at your talent landscape.
I often hear from PayScale customers that they only want to compare themselves to similarly sized organizations in their own industry when pricing their jobs. However, the competitive landscape for talent is typically much broader than that. For one thing, many jobs exist across all kinds of industries. Likewise, there are often companies whose entry into a new labor market has a ripple effect on pay, up and down the size spectrum (think Amazon and their network of distribution centers across the country).
Now that doesn’t mean you have to adopt a comp strategy to pay like larger organizations or those in different industries, but you should definitely look at what’s happening around you and have a conversation about it with key internal stakeholders. The result of that conversation should be a decision on the cut of salary data you will use for benchmarking: industry, size, revenue and location(s).
4. Weigh what you can afford to do against what you’re willing to do.
The other key component of your comp strategy is how competitively you plan to pay — the percentile in the market where you intend to pay proficient employees — and if, for strategic reasons, that should differ by job function, level, location, or some other factor. The 2017 CBPR found that 57 per cent of top-performing organizations and 59 per cent of enterprise organizations target a higher market percentile for more competitive jobs (i.e., those where a scarcity of qualified talent is driving up pay).
Crunch the numbers here and examine a few different scenarios to ensure the affordability of your plan. And then consider: even if you can afford to target higher base pay, is that a smart decision for your organization right now? Where does variable pay fit? A full 82 per cent of top-performing companies and 74 per cent of all organizations surveyed in the 2017 CBPR incorporate variable pay into their comp strategies. With an attractive mix of base and variable pay, depending on your market, you may not need to target a higher percentile.
That said, there are many organizations that want to offer higher pay so they can be more competitive in the war for talent but simply can’t afford it, a situation that comes up frequently with my small business and non-profit clients. Here’s where the comp strategy becomes even more important: in these cases, I advise clients to be realistic when they define it, be transparent when they communicate it, and be enthusiastic about everything else they offer that makes them an employer of choice.
5. Gain executive buy-in.
Now that you’ve got this far, don’t forget what is arguably the most crucial step: getting your executives to approve the comp strategy. The 2017 CPBR found that 57 per cent of organizations agree that compensation is becoming more important to executives, meaning they’re increasingly seeing the link between pay and company performance. (Walmart anyone?) And remember: a comp strategy isn’t “set it and forget it;” engage your leaders on a regular basis to look at where your organization is today and where you want to be tomorrow. This way, you can set a comp strategy that will evolve along with your business.
Kari Van Hoof, CCP, is a compensation professional at PayScale.