A Compensation Analysis For Human Resources Professionals By: Geoffrey Learmonth

What We Cover Compensation Philosophy Gathering Market Data Risks of Market Data Identifying Benchmark Jobs Market Position Analysis Creating Summary Statistics Red & Green Circle Rates Budget Checking & Communication To Stakeholders Summary

Before We Begin Open up the Microsoft Excel template by clicking here: Follow along as we show you the framework for completing a compensation analysis

Compensation Philosophy World at Work describes a Compensation Philosophy as a statement explaining an organization’s beliefs about how people should be paid, as well as how that pay should support the business strategy and fit within an organizational culture A key component is how the organization intends to pay its people relative to its competitors Understanding your organization’s Compensation Philosophy is required before conducting any compensation analysis, as all steps in the process must be consistent with that philosophy

Compensation Philosophy (Example) “ABC Company's compensation philosophy is to motivate its employees with a total rewards strategy which includes a combination of base salary, short-term incentives, a stock purchase plan and benefits. We aim to pay our employees at the median (50% percentile) of market base pay and further reward them with other elements of our total rewards strategy.”

Gathering Market Data Market data is compensation data from outside sources Survey providers provide a list of job titles and descriptions along with relative compensation data (e.g. salary, bonuses) for each position In order to make proper use of these surveys, an organization must have the proper resources and abilities to match internal jobs with survey jobs Mercer, WorldatWork, StatCan, Willis Towers Watson, and Morneau Shepell are common survey providers in Canada Refer to the Excel workbook for a sample of positions and their salaries

Risks of Market Data Market data is merely an estimate of the real world; it is imperfect because it requires users to match internal jobs to preset job titles and descriptions which may not be entirely accurate Survey providers often offer discounts to organization’s participating in their surveys; this may lead to the GIGO (garbage in, garbage out) principle taking effect, as organization’s will put in little effort to matching their internal jobs just to receive the discount This feedback loop cannot be eliminated, but can be significantly reduced by seeking out survey providers who have large sample sizes for a wide variety of positions Before purchasing a survey, which can often be quite expensive, companies must have an understanding of what positions they are looking to match and approximately how many samples the survey provider expects to have for each position

Identifying Benchmark Jobs Benchmark jobs are jobs that have a standard set of responsibilities that transfer well from organization to organization As a general rule of thumb, a job can be considered a benchmark job if its duties reflect at least 70% of the duties required for your organization Furthermore, if you are planning on using benchmark jobs for your organization, at least 50% of the roles must be benchmarked The Excel workbook lists a sample of benchmark jobs published by the University of Iowa

Market Position Analysis The job titles found in market surveys are considered to be benchmark jobs The most time consuming, yet most important part of a compensation analysis is correctly matching internal jobs to their benchmarks Note the strength of each match as you complete this exercise; this will help you keep focused in team meetings Once matched, you can compute Market Compa-Ratios for each job by dividing the internal salary by the market salary

Creating Summary Statistics With just a few linked sheets, you can create a dashboard of summary statistics useful to management Present individual and departmental costs under different scenarios (i.e. cost to bring all employees up to a minimum compa-ratio) Clearly show cost overruns and present plans for overcoming budget shortfalls Statistics update automatically as scenario inputs change

Red & Green Circle Rates Red circle rates occur when an employee is paid above the maximum salary for that position, while green circle rates occur when an employee is paid below the minimum salary for that position Many organization’s maintain a range (e.g. between 75% and 125% of midpoint) and attempt to pay their employees within that range based on skills and experience in the role However, a variety of factors such as being new to a role or in a “hot skills” job, can cause red and green circle rates HR professionals should monitor these and create plans for dealing with them when they occur

Budget Checking & Communication To Stakeholders Checking against the budget should be done regularly to ensure the proposal meets with management’s expectations An analyst should provide management with a number of different options to meet their budget, all of which are consistent with the company’s compensation philosophy Consider lump-sum increases for employees significantly above midpoints to allow for flexibility in the future Discuss who, when and how increases will be communicated, and coordinate with finance, accounting and payroll

Summary Create an Action Plan Template for performing an Employee Salary Review Ensure your goals align with your organization’s Compensation Philosophy Devote significant resources to ensure you are matching internal roles properly, and beware of surveys which do not offer adequate sample sizes Summarize and track as many key statistics important to management as possible Provide management with creative solutions for meeting budget