The Human Resource: Compensation practices

How much thought have you put into your compensation practice?  Small employers often pay what candidates ask for because they need to hire people with no regard to any formal process or practice around compensation. In time, as the small business grows, they will experience various challenges if they don’t do something about their compensation practices.  Here we explore two compensation topics to guide you towards greater success for your business.

Same Job but Different Pay Rates?

Have you ever felt like you are not getting paid the same as those around you doing the same job?  If so, you are not alone.  A common problem in the workplace is pay-inequity.  This situation happens when new hires are provided a significantly higher or lower wage than an incumbent in the same role, or over time someone was favored over others and received more significant raises, etc.

My guidance to you and your organization is to make sure you establish clear and consistent compensation practices to both defend your employment practices from a regulatory compliance perspective and from an internal perception and employee relations lens.  This means that you should conduct periodic compensation reviews for internal equity in each position for which you have more than one incumbent in the role.  If there are statistically significant differences in pay, make sure the reason for these differences is: (1) based on a non-discriminatory reason, and (2) can be clearly defined.  A few examples of appropriate justification for pay inequity in a position would be tenure in the role, their education level, and professional experience.  Illegal reasons would include age, gender, race, and any other protected characteristic.

From a practical angle, there is tremendous damage done to the morale of a workforce and a disservice to your culture when you have pay inequities that cannot be appropriately defended.  Employees should understand how your compensation programs work, and what they need to do to be eligible for increases in compensation, such as base wage/salary increases tied to a performance program or system, promotional activity, incentive programs, and commission plans.

Use caution when hiring externally for positions, as the market rate for new employees in a position may not be aligned with internal equity of the same position, and if you simply try to match the “asking price” of new hires you will create and promulgate the problem into your organization.  Know the value of your workforce and be sure to compensate your employees fairly, they will demonstrate appreciation through productive job performance and loyalty resulting in lowing turnover.

Hiring External Staff for More than Internal Staff Killing Internal Equity

Usually promoting internally is a good way to lower costs, create a talent pipeline and build morale. Although, sometimes internal candidates might not have the right skillsets for the job. Hiring an external candidate with more experience could give your company a fresh perspective, however, they are wanting to be compensated at the market rate.

Market rate is what other employers consider to be fair compensation for the same candidate. Your company’s budget and internal equity issues are irrelevant. Internal equity means ensuring fairness in pay for employees working similar jobs. When hiring you are competing with other employers to hire the most highly qualified candidate.

An important thing to remember is internal equity is not a hiring issue, it is a compensation issue. Internal equity problems do not occur in organizations that pay market rate.  They only occur when an employee is underpaid compared to their market value.  This cannot be solved by trying to hire new external employees at below the market rate. This problem generally requires internal compensation analysis and internal equity adjustments for underpaid employees as a solution.

An unresolved compensation issue will hinder your hiring and if you are paying below market rate it will cause for a significant turnover.  More than anything, taking the time to review your company’s internal equity shows that your company wants to thrive for years to come and be well-respected within your industry. Demonstrating your company’s integrity will attract the customers and employees you need to succeed.

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About Warren Cook

Warren S. Cook is a co-founder of SymbianceHR and leads all client-consulting engagements. He is a human capital strategy management subject matter expert with more than 20 years of experience as a strategic business partner, project manager, and people leader across private and public sectors organizations. Warren is responsible for all client-consulting engagements from initial needs assessment and compliance review through delivery of customized complex human capital strategy solutions that meet the client's business goals. He has a proven track record of providing executive coaching and guidance to business leaders and human resource professionals at all levels including the C-Suite of Fortune 100 companies. Warren combines his human capital, project management, and business management experience with a philosophy of solving business challenges through the strategic implementation of policies, processes, and procedures to deliver sustainable solutions that demonstrate ROI, mitigate and manage risk, and empower organizational success. Warren is the author of “Applicant Interview Preparation – Practical Coaching for Today” and holds a bachelor of science degree in human resource management, a master’s of business administration in project management, and a master’s of science degree in industrial and organizational psychology. He is also a SHRM Certified Professional.

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