CompensationRatio.com is here for the HR Community
Find the tools you need at CompensationRatio.com
Welcome to CompensationRatio.Com
Our Mission
Here at CompensationRatio.com, we aim to provide Human Resources professionals with the tools and resources you need to better understand the fundamentals of Compensation and administer pay the right way.
Total Rewards Strategy
Why do you need a Total Rewards Strategy?
Many companies design a total rewards plan without fully understanding its purpose. When crafting your total rewards strategy, it is crucial to not only know what you are offering but also why you are offering it. Here are some key components that can help your organization develop and implement a comprehensive total rewards strategy.
Compensation
Compensation can be categorized into two forms: fixed and variable pay. Fixed pay refers to your salary or hourly rate, which is often determined by governmental regulations. This type of pay is guaranteed for services provided and serves as the baseline to complete the job. On the other hand, variable pay is not guaranteed and can fluctuate based on various factors. Common examples of variable pay include bonuses, sales incentives, restricted stock units (RSUs), stock options, and profit-sharing plans. These are just a few examples of variable pay plans.
Benefits
Many employees primarily associate benefits with health insurance, disability insurance, and retirement plans such as 401(k) or pension schemes. However, the scope of benefits extends far beyond these basics. What kind of company discounts do you offer? Does your organization provide matching charity donations? What benefits are available for working mothers, diversity, equity, and inclusion (DEI) initiatives, or legal advice? When selecting your benefits offerings, it is essential to consider a wide range of options that can help attract and retain the talent your company needs.
Flexibility Options
Think work/life balance isn't as crucial as compensation or benefits? Think again. In today's job market, particularly within corporate environments, the number of PTO days, remote work options, and even company resources like a company phone or the latest software versions can significantly influence whether a candidate or employee chooses your company over another.
Career Development & Recognition
The average tenure of an employee in today's organizations is approximately two years. This isn't merely by chance but often a result of deliberate or inadvertent design. Typically, it takes about one year for a new employee to fully acclimate to their role, and by the end of the second year, they may seek new challenges. Will these challenges be within your company? To reduce attrition rates, it is crucial to implement both formal and informal recognition plans for your employees. However, remember that recognition alone has its limits. Creating opportunities for growth, such as promotions, lateral moves, stretch projects, progression plans, mentorships, and educational offerings, is essential for retaining and developing your talent.
Creating your Compensation Philosophy
What is a Compensation Philosophy
A compensation philosophy serves as a guiding framework for administering your compensation plan. This philosophy is typically shaped by the mission statement and goals of both the organization and the HR department. By leveraging your compensation philosophy, you can drive the desired behaviors in your employees, steering your company toward success.
Compensation Philosophy and Salary/Hourly
Your company's compensation philosophy will determine its competitive stance on pay relative to other companies. A common approach is to set salaries at the 50th percentile (P50) of the market, indicating that your company offers compensation that is average within the market.
Variable Pay
Variable pay can take several forms, including Short-Term Incentives (STI), which are variable payments made to an employee within one year, and Long-Term Incentives (LTI), which are payments made over a period longer than one year. These definitions, as established by World at Work, highlight how variable pay can fluctuate based on an employee meeting certain goals as well as the overall success of the organization.
Note: While numerous factors can influence a variable pay plan's success, a straightforward variable pay plan is typically most effective. We highly recommend implementing variable pay plans that are easy for employees to understand.
Compensation Tip: Ensure competitive pay for your sales employees. Traditional sales staff significantly contribute to company growth more than non-sales roles (unless you're working in the online goods and/or services sector). If your support employees earn more than those selling your products, this may lead to long-term issues.
Non-Monetary Tools
Leverage both monetary and non-monetary tools to motivate your employees. Often, small gestures of recognition can have a significant impact.
Pay Administration
Factors in putting together Salaries and Bonuses
Determining competitive pay can be challenging, whether you're setting a base salary, hourly rate, or introducing a variable pay plan to foster a performance-driven culture. By leveraging these data points, you can create a competitive and fair compensation strategy that attracts and retains top talent. Here are some key data points to consider before finalizing a pay offer:
Budget
While it may seem straightforward, understanding your budget is one of the most critical components when determining pay. You cannot increase someone's salary if your company cannot afford it. Maintaining a holistic view of the budget is essential for making informed and sustainable compensation decisions.
Exempt vs Non-Exempt
The Department of Labor (DOL) has specific guidelines for determining whether a position is exempt from overtime pay or requires compensation for overtime hours worked. While we cannot cover all these requirements on this website, it is crucial for HR professionals to be well-versed in these regulations when filling positions. For detailed information, visit the DOL website, but keep in mind that state regulations may be more stringent. It is essential to administer exemption status based on the requirements that are most favorable to the employee to avoid legal ramifications.
Internal Comparators
As an HR professional, you may have observed that analysts across various departments tend to receive similar pay. This is because their skillsets often overlap. When crafting a pay offer, it is crucial to examine other positions with similar job requirements to make informed decisions. Additionally, remember to review pay data for levels above and below to ensure a comprehensive understanding and greater confidence in your decisions.
Compression
Compression refers to the pay spread between a position being reviewed and the compensation of that employee's manager (as well as direct reports). While guidelines for this spread can vary, a general compensation principle is that managers should typically earn more than their direct reports. Although exceptions may exist, such as a highly skilled specialist reporting to a manager without that specific expertise, these cases should be exceedingly rare.
Market Data
To compete effectively for talent, it's crucial to understand the average pay of like positions. This information is often obtained through third-party companies such as Hay/Korn Ferry, Towers Watson, and Aon Hewitt, among others. These organizations provide valuable insights to HR professionals, helping them understand average pay both nationally and within specific geographic regions.
Geographic Differentials
There are numerous effective tools to help you understand how pay varies across the country. Generally, most senior level positions offer more consistency in total direct compensation, making geographic differentials less impactful. However, for most roles, salaries in cities like New York City or San Francisco tend to be higher than in other regions.
Performance/SPF Factors
Most companies aim to prioritize what HR professionals refer to as HiPo/HiPerf talent (High Potential/High Performer). The general guideline is to compensate these employees as competitively as possible to reduce attrition and convey a promising future with the company. However, it's also crucial to consider SPF (Single Point of Failure) employees. While SPF employees may not be the top talent, preserving their institutional knowledge is often vital to avoid disruptions if they leave the company. Typically, SPF status alone doesn't warrant higher pay, but leadership may decide on a pay adjustment if necessary.
Salary Structures
We left this metric for last because it often proves to be the least critical, allowing compensation professionals to work around it when evaluating pay. A salary structure, also known as a pay structure, is a framework that outlines how much employees are compensated based on their job roles, responsibilities, and levels within an organization. This structure helps ensure that pay is consistent, equitable, and aligned with the organization's compensation philosophy. A metric used to determine pay competitiveness is the Compensation Ratio, or CompaRatio. The CompaRatio is calculated by dividing the base salary by the midpoint of the salary structure. Generally, a 1.0 CompaRatio indicates that an employee's pay aligns with what the company expects to pay for the position. Salary structures can be used as an alternative to market data and/or to represent the company's Compensation Philosophy. See the links below for tools to create your own salary structure for your organization.
Job Architecture
Let's get the team together
Like chess pieces on a board, having the right structure and roles is crucial for optimizing your organization's operations. Companies typically have a hierarchy that includes Senior Executives, Vice Presidents, Directors, Managers, Analysts, and Coordinators. This structure ensures a seamless flow from high-level vision and strategy developed by senior leadership to effective implementation and execution at the junior levels.
In today's business landscape, many companies adopt a pentagon-shaped structure. While this can be effective for various reasons, it might not always be the best fit for every organization.
Strategy & Execution
Before diving into specifics, it’s crucial to recognize that no two businesses are identical. A structure that suits a traditional large-cap company might not be as effective for a start-up with fewer than 100 employees. Tailoring your organizational structure to the unique needs of your business is essential for optimizing efficiency and achieving success.
Market data can be invaluable in helping a company build an effective team. Survey data companies often include employee counts alongside pay data for a reason. This information serves as a guideline for determining team size, but other factors must also be considered. Generally, the number of employees executing a plan, product, or service should exceed those designing the strategy. If your company has more true VP-level positions than Analysts, it might indicate a focus on strategy over execution, or it could signal a need to reassess team efficiency.
Efficiency in FSLA Exemption
In the U.S., if a position is identified as non-exempt, federal and/or state law requires the company to pay 1.5 times the hourly rate for hours worked over 40 hours per week. While this may be expected during certain periods, the average employee should not consistently work over 40 hours a week. Excessive overtime should be a red flag for any company. It could indicate poor performance, employees taking advantage of additional pay, or insufficient resources to complete the required work. Addressing workload issues is essential, as overworked employees are prone to burnout, which increases the risk of attrition. Additionally, excessive overtime can complicate promotional opportunities. Employees may be reluctant to accept higher-level positions and lose overtime pay associated with non-exempt status.
Another common issue many companies encounter is senior-level employees performing an excessive amount of non-exempt level work. If a Director or VP is spending a significant amount of time on administrative tasks, it may indicate that the position is not appropriately leveled or structured. Additionally, the company might be overpaying for the work being performed. In severe cases, this could even trigger an FLSA (Fair Labor Standards Act) review of the job responsibilities.
Communicating your Compensation Plan
Info, Info Info
As states increasingly enforce pay transparency requirements, it is more critical than ever to ensure your total rewards offerings are clearly communicated to your employees. Here are some effective communication tools to address employee questions about pay:
Total Rewards Statements
A popular option for communicating total rewards is to create an annual total rewards statement. Companies that produce these statements typically inform employees not only about pay changes but also about the full range of benefits offered by the company. Does your company offer a 401(k) match? Pension? Many employees are often unaware of the complete total rewards package available to them. Providing a comprehensive annual statement can ensure they fully understand and appreciate the value of their compensation and benefits.
Employee Handbook/Comp Philosophy Document
An employee handbook can serves as a crucial communication tool for explaining compensation. It can provide a structured and comprehensive guide where employees can find detailed information about salary structures, pay scales, bonus programs, and benefits packages. By clearly outlining compensation policies and procedures, the handbook ensures transparency and consistency, helping to manage employee expectations and avoid misunderstandings. Furthermore, it can educate employees about performance-based pay, promotion criteria, and how compensation aligns with the company's overall goals and values. This accessibility to information empowers employees to understand their total rewards, fostering trust and engagement within the organization.
Intranet Site
One of the significant advantages of an intranet site is its role as a comprehensive resource for employees to access information on compensation communication statements and plan documents. An intranet can provide tools to help employees better understand how to predict variable pay and the metrics that determine it. Maintaining an intranet site also reduces the volume of questions directed to HR Business Partners and Total Rewards teams. Additionally, an intranet site can house company job descriptions and maintain an organizational chart, providing easy access to essential information.
Schedule One-One Meetings
While one-on-one meetings are the most traditional method for communicating changes in compensation, they can sometimes be a missed opportunity for effective communication. Managers often focus on conveying new salary or hourly rates and bonus payouts without taking the time to explain the "why" behind these decisions. Additionally, these sessions should be used to reinforce information about company bonuses, career progression, and mentoring opportunities. Holding one-on-one meetings not only serves as a platform for communication but also as an opportunity to motivate employees, a task that is frequently overlooked.
HR Meeting with the Field
HR meetings are valuable for helping employees understand compensation topics such as details of a Short-Term Incentive Plan (STIP), Long-Term Incentive Plan (LTIP), or job architecture plan. While it might seem optional for Compensation professionals to attend these meetings, it is strongly discouraged. Many employees outside HR are unfamiliar with the Compensation team members, often by design. HR professionals should handle all communications with the field to prevent employees from bypassing proper channels and contacting the Compensation team directly. Typically, the HR Business Partner should serve as the primary point of contact for HR-related matters, as they possess a deeper understanding of the business's status and leadership's perspectives.
Newsletters
What's New? Some HR departments send periodic newsletters, either via email or as printed documents, to keep employees informed about company programs and benefits. To make these newsletters effective, be sure to include contact information, allowing employees to ask questions and seek further clarification.
Compensation Projects
Ongoing Responsibilities
Your company may have developed a comprehensive compensation philosophy, strategy, and model for paying employees, but the work doesn't stop there. By continuously working on these projects, Compensation Teams help ensure that the company's compensation plan remains fair, competitive, and aligned with organizational objectives. Here are some examples of ongoing projects that Compensation Teams undertake to effectively administer your Compensation plan:
Compliance Updates
It's essential to stay abreast of and adapt to changes in labor laws and regulations to ensure compliance. As job responsibilities evolve, there's an increased risk of falling short of FLSA requirements. Continuously review and understand job duties to ensure that employees performing non-exempt work are properly compensated for overtime hours worked. This proactive approach helps maintain compliance and supports fair pay practices.
Annual Cycle
Some examples of annual cycle projects include merit increases, bonus administration payouts, and salary structure adjustments. To streamline these processes, be sure to explore our project plan templates in the downloads section. These templates provide detailed steps and guidelines to help you effectively implement the annual cycle, ensuring a smooth and efficient workflow.
External Survey Participation
If you want to purchase market data, most third-party companies require participation in their surveys. Typically, the larger the company, the more surveys your team needs to complete. For start-ups, it is recommended to have at least two sources of market data, with one serving as the primary source. In larger companies, it is not uncommon to rely on seven or eight survey sources to ensure comprehensive data coverage.
Changes to Incentive Plans
Priorities, metrics, and goals are constantly evolving, making it essential to keep your plan documents up to date. For instance, last year's focus might have been on Sales Growth, while this year's emphasis could shift to Revenue. It's crucial to continuously update your plan documents to reflect these changes and ensure your employees are informed about the company's current focus.
Geographic Differentials
To pay your employees competitively, it's essential to stay up to date on the cost of labor in the localities where you are hiring. While pay in cities like New York City and San Francisco tends to be higher than the national average, the cost of labor can change over time. We recommend reviewing the cost of labor annually to ensure your pay offerings align with your compensation philosophy. A valuable source of information for geographic differentials is the Economic Research Institute (ERI), which provides updated pay averages based on the cost of labor in the U.S.
Contact Us
Have questions or comments? We're always here to help. Contact us today and we'll get back to you as soon as possible.