5 ways to document your compensation plan

Originally published on HernerConsulting.com.

This week marks the fifth week in my new job. There were zero days of overlap between me and my predecessors, neither of whom had my exact job. I’m in a brand new job, the first dedicated compensation person. I know I’m not alone in this situation. Actually, when I think about it I’m often in this situation as I’m drawn to jobs that don’t yet exist and I’m good at setting up systems and processes.

I’ve spent the past few weeks familiarizing and uncovering everything I can about how compensation has been handled. Thankfully, my new boss has let me take time to get my bearings before diving into the comp cycle for the year. As I do, I’m documenting, streamlining, and keeping an eye out for potential improvement.

It got me thinking: what are top five things that every organization should document about compensation?

1. Document the plan

First and foremost, all elements of a compensation plan should be documented. Some companies start with pay ranges and get more specific from there. Some start with philosophy so they can clarify alignment to culture, but then skip right over the strategy. To have a fully fleshed-out comp plan, document all six of these elements:

Philosophy: the high level view of what you want to accomplish with your compensation dollars.
Strategy: how you plan to operationalize your philosophy, including competitive markets, level of competitiveness, and what you plan to reward.
Pay ranges or structure: the min, mid, and max for pay assigned to each job, based on market data.
Policies: help make sure you carry out your plan as intended in the structure, strategy, and philosophy.
Processes: the tactical steps people follow to carry out the plan.
Communication: the level of transparency and how much information employees and managers can access.

2. Document the comp evaluation processes

When it comes time for a comp cycle, the process will vary depending by organization. For some, an annual cycle works, while others need a more complex multi-faceted set of cycles grouped together. Because of this variety, it’s a good idea to document your specific evaluation processes:

Comp cycle

When is your comp cycle or cycles? What are the critical dates to be aware of for payroll? For budgeting? For planning around other key organizational dates? Depending on the organization’s systems and processes, the typical comp cycle can take anywhere from a few weeks to a few months or more. Some of the factors that will decide the timeline include how many people are involved in setting or recommending pay and how manual your processes are.

Plan evaluation

When and how do you complete your plan evaluation? Do you adjust your ranges to market every year? If so, how and when do you decide how much to move them? Do you have some critical jobs that you evaluate more frequently than annually? If so, which jobs and how do you decide what to do with them (bonus, pay adjustment, or range adjustment? All of the above)?

Role clarity

How much manager and other key stakeholder involvement does your cycle include? What exactly are the roles held by each player, and what happens when an approver overrides a recommender? Are your pay communicators also pay recommenders and how might that impact the way they deliver the information?

3. Document changes to your plan

Most companies change *something* about their plan at least annually. If they don’t, I guess I wonder if and how they keep current to the market since the market definitely changes at least annually. These types of plan changes should definitely be documented:

Strategy

Did something big change that required a shift in how you prioritize pay for key positions or functional areas? Document these big picture strategy changes.

Ranges

Did you adjust your pay ranges overall? Sometimes companies will move their ranges by two to four per cent. If you did, make sure you document the reasons for the adjustment. For example: “Per Payscale data, ranges should be adjusted 1.8 per cent, per World at Work data ranges should be adjusted two per cent overall. Decision recommended 10/15/2017 to increase ranges by two per cent, two per cent increase approved by executives 10/22/2017.”

Pay Grades

Some jobs move faster than others in the market. Most organizations take this into account and adjust pay grades for individual jobs to match market movement. Track market-based recommendations, movement based on internal recommendations, and when you don’t adjust pay grades, despite either market or internal recommendations.

4. Document the exceptions

I think most people responsible for compliance in organizations want to believe there are never exceptions. But the hard and honest truth is that people are individuals and sometimes individuals are just exceptional. This is the time that it’s important to remember that comp plans are just that: plans.

Anyone who has ever been on a family road trip knows that even the best plans can go awry. Just like the many road trips to watch the eclipse this week, things may not go exactly as intended with compensation. And that may be exactly where exceptions come into play. Here are a few examples of comp exceptions that may come up.

“We didn’t realize her skillset when she joined. She’s definitely more advanced, so we need to make an adjustment to bring her higher in range.”
“So and so excelled in a high profile, cross-organizational, ongoing project that was completely outside their scope of responsibility, so we need to make an adjustment to give a higher increase than recommended.”
“This job has been hot in this area. We just brought in two new hires at a higher rate than this employee who has demonstrated his performance and proficiency in this role during the past two-plus years. As a result we are giving him a market adjustment of x% to increase his pay. He is still eligible for a merit increase during the comp cycle.”

The trick to keep in mind, when making exceptions, is to ask yourself two things: will we be OK if this exception is publicized on the internet or across the organization internally? And, how will we communicate this exception to the employee? Hint: “market adjustment.”

Frankly, I don’t intend to minimize the risk of exceptions. If you make a bunch of exceptions for low-performing white men, while making no exceptions for high-performing women and/or people of color, you may still be putting the organization at risk. Use exceptions wisely and document them well.

5. Document decisions along the way

Back to that notion that plans are plans, I find that often comp cycles include a whole host of quick decisions that are made on the fly to further refine this year’s compensation strategy or plan in some way. Before you get too far, come up with a way to track all those “in the moment” decisions. Sometimes they are harder to remember at the end of the comp cycle, after the heat of the moment has passed.

One better than that is to keep a history of all spot decisions and comp changes over time so you have easy access to these changes. It may be tempting to come up with an excel file or word document to hide within the many files associated with the comp cycle, but don’t bury it! Keep the key decisions visible, year after year, so that you have one place to look to get a sense of what choices have been made regarding the compensation plan over time.

The average tenure in the US is 4.2 years. The average tenure among HR and Comp professionals isn’t much higher. So, as a colleague once taught me, be good to your future self and start documenting now. Your memory and knowledge of what happened work great, until the day you give notice.

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Mykkah Herner, M.A., CCP, is a compensation and human resources professional with more than ten years of HR experience. He has designed compensation strategies for over 400 organizations, poising compensation to drive business results.

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