How To Effectively Manage Base Compensation with Pay Grades

In today’s Advisor, Rizzuti, who is a principal at PHR Compensation Resources, Inc. in Upper Saddle River, NJ, shares her tips for managing base pay in low budget times.

Here are the current compensation mindset issues we’re seeing, says Rizzuti:

• Coming out of it. All of us have been dealing with a difficult environment, Rizzuti says. Organizations that have hunkered down are thinking, if we’re at end of it, we need to take our heads out of sand.
• Evaluating market competitiveness. With low or no merit increases over past 3 years, we need to evaluate what effect that has had on our competitiveness.
• Strategic plan. We need to make sure our comp system is keeping on track with our strategic plan.
• Total package. We need to focus on communicating the value of the total rewards package. Many companies have frozen and no bonuses, but still there’s inherent value in the total package.
• Pay for performance. We need to consider the trend away from entitlement toward tying pay to performance. With limited dollars, companies want to make sure that employees are actually performing to deserve the increases they get.
• Compensation Budgets. Merit increase budgets continue to be modest (approximately 3.0% for 2012). That makes for a continued challenge in differentiating pay based on performance. For sure, don’t give increases to those who don’t meet performance standards. Yes, smaller budgets make it more challenging, says Rizzuti,  but a formal structure will help.
• Inconsistencies. Many clients, when they take a careful look at their situations, find inconsistencies. For example, one client found that the company was paying part-time employees considerably less than market was paying. Part-timers were not doing anything different, brought to market and prorated on hourly basis.

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Tuning Up Your Compensation Philosophy

To get started with setting up or revising your compensation program, start with your compensation philosophy, says Rizzuti. That establishes your company’s position relative to market. For example, against its competition, one of her clients wants to be at the 50th percentile for base pay, the 66th percentile for variable pay, and the 75th percentile for total compensation.

But it’s different for every company, Rizzuti says. Another client goes low for base and current compensation, but has a strong concentration on retirement income and work/life perks.

Your philosophy arises from an analysis of

• Corporate Mission & Global Goals
• Base Salary Administration
• Performance Management
• Annual Incentive Programs
• Special Achievement & Recognition Awards
• Long-term Capital Accumulation Programs
• Benefits Programs
• Career Development

Assess your Compensation Philosophy

To get started assessing your compensation philosophy from time to time, ask:

• What’s happened with the economy?
• What’s happened with the company?
• What labor market(s) do we now compete in, for business and talent?
• What is our desired level of competitiveness?
• What is an appropriate mix of pay elements?
• What degree of variability will be reflected in pay?
• What is our commitment to professional growth? (Some companies are adding a statement that we are committed to the ongoing growth of employees and exposure to industry trends and changes.)

Clearly Communicate Your Plan

However you choose to go, it’s critical to communicate your plan to the people. Make sure that employees know:

• The company’s pay-for-performance position
• The elements of pay: base, variable, long term components
• Total rewards package
• The company’s commitment to maintaining competitive position (We will reevaluate against the market every two or three years)

Evaluate Competitiveness

Using the pay position that you identified in your philosophy, do the following:

• Identify competitive market(s) by industry, geography, revenue, etc. (Rizzuti notes that where companies used to look at a whole sector, for example. All manufacturing, they are now drilling down, to, for example, precision manufacturing
• Clarify key criteria for benchmark positions
• Ensure job descriptions are accurate
• Because of what has happened, many job descriptions no longer reflect what the job entails—many hybrid jobs now as a result of downsizing.
• Have to have accurate job descriptions

Also while you are at it, check FLSA classifications. Because of changes, the FLSA classification may be inaccurate

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Competitive Recruiting Market

You also want to review competitive market from the recruiting standpoint. What level of compensation do you need to recruit successfully?

In tomorrow’s Advisor, more steps in market an, plus an introduction to a timely webinar: Market-Based Compensation: Legal and Practical Essentials for Keeping Top Talent.