The 6 Most Common Compensation Mistakes

He typically finds that some employees are paid too little (and likely to jump ship at the first opportunity) while others—whose specialties were desperately needed—make more than they should (and that’s robbing profits). To make matters worse, he says, no one knows which is which.

Here are six of the most common compensation mistakes Erdle sees:

1. Lack of Objectivity Versus Internal Equity

As an outside expert, Erdle doesn’t have a problem using a dispassionate approach when comparing one job against another. But a company employee might. When you choose a salary survey that includes the companies you believe to be your competitors for talent, take it seriously and try to be objective, he suggests.

“A lot of times managers or even HR people try to be objective when evaluating the jobs, but they have a hard time with it. Often, they’ll match an existing job with one that’s a higher level in the survey. Maybe they match the company accountant with a senior accountant in the survey, when the job should be graded and paid as a junior accountant.

Part of the issue can be that they know the incumbent, and the incumbent’s performance may influence how they evaluate the job. You need to focus on the job alone. Performance issues need to be addressed elsewhere.”

At the same time, Erdle says, internal equity is a very strong force for some companies. “You can go through the process of setting up a system based on where you want to pay against your market, but you also have to consider the internal value of the jobs. How the company values the jobs internally ultimately decides how much they want to pay in relation to the market,” he says.

“For example, the market says that software engineers are a highly-paid subcategory of engineers; mechanical engineers, industrial engineers are paid less. But some companies want all engineers in their organization to be graded the same. They want their internal equity to be maintained, and grading them differently would take away from that. You may need to readjust the salary grades for those jobs so that they make sense for your company.”

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2. Choosing the Wrong Survey

First, says Erdle, learn about the competition. “And I don’t mean competitors in your industry, necessarily,” he says. “I want to know about competitors for your people. I need to find out where the company wants to pay in relation to those other organizations, and then I look for salary surveys that have those organizations in them.”

While free and cheap salary surveys are available online, he warns against them, saying you will likely get what you pay for. “Usually in those surveys incumbents are reporting their own data. They might fill out a form on the internet. People tend to exaggerate the level of their job, and sometimes their pay.”

And sometimes the survey matches jobs just based on the title, not on the description of the job duties. They don’t often go through and match actual duties.

“I don’t think that is anywhere near as good a survey as one that’s done by trained compensation professionals matching and reporting data. You need a survey that has specific companies represented, and you know which companies are included. That provides face validity to the whole thing. It looks right. So if you’re a high tech company, Intel is in the survey, and so is Tektronix, and so is Mentor Graphics, for example. That goes a long way toward credibility for the survey.”

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3. Mining the Wrong Data

Once you’ve chosen the right survey, you need to make sure you’re mining the right data from it. “I always look at the total survey because it’s the largest sample size,” Erdle says. But he doesn’t stop there. “You can also select for revenue or geography or a sub-industry. Many times a company doing this themselves will pick exactly the selection they’re in, in terms of size and industry and location.

What you really want to compare against is the companies you are losing people to and the ones you’re bringing employees in from.

“You want to analyze these other companies as opposed to only the ones in your specific niche. That might mean a higher data selection than just their current position, as far as revenue or other things. I look at maybe five different data selections, including the total survey, and go through and analyze them for each employee or employee group. If they’re at similar rates of pay that gives some indication of competitiveness.”

In tomorrow’s Advisor, mistakes 4, 5, and 6, plus news about how to preview BLR’s brand new Compensation Analyzer.