Not every company has a formal name for it, but every organization that hires employees has to have an idea of what they’re willing and able to pay those employees. Pay and benefits may be determined ad hoc in many organizations, but there are actually a lot of benefits to creating a more formal structure around how pay and benefits are decided. Even for organizations that already have some structure in place, there may be aspects that can be fine-tuned.
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Having a formal plan for determining and administering pay and benefits is often referred to as “compensation administration.” There are many reasons it benefits everyone to have a formal plan in place rather than addressing salary levels on an individual or ad hoc basis. Here are some examples of benefits for employers. Formal compensation administration programs can:
- Ensure fairness and consistency in salary levels, which can help with retention and morale, and thus help with productivity.
- Help to ensure that the company is competitive in the talent marketplace by comparing to external benchmarks and making adjustments when necessary.
- Allow greater control over budgeting if salary levels are mostly predetermined (within a range) for each role.
- Allow the organization a straightforward means to differentiate wages for different roles requiring different expertise, experience, or education.
- Encourage employees to stay because they do not feel the need to leave the organization to simply get a pay raise. (This is because a formal system can include a policy of how raises are doled out.)
- Help to shield against claims of discrimination if every similarly-situated employee is paid an amount commensurate with their skills and experience level and level within the organization.
- Allow the organization a formal means to ensure that all aspects of payroll are meeting local and federal legal obligations, including fair pay standards and all legal aspects related to benefit program implementation.
Compensation Administration: What to Consider
When making a formal compensation administration policy or program for your organization, there are many things to consider:
- Does your organization need a system that incorporates some form of pay grades or tiers?
- Where do you want to be in terms of market competitiveness for talent? Is it in line with the organization’s goals to pay the average of the market rate? Or does it make more sense to pay at the top of the market rate? Or is it most aligned with the organization’s goals to minimize the amount spent on wages?
- If you already have a pay grade structure in place, are all of your employees properly classified within it?
- Are all workers properly classified in terms of exempt versus nonexempt status? Have you audited to ensure this and to ensure that there are no inappropriate exceptions?
- Are your workers properly classified as employees versus independent contractors?
- Do you have a formal plan in place to give cost-of-living pay raises? What about merit pay raises? Do your employees know about and understand the plan/policy?
- Do you conduct formal performance appraisals, and are these directly tied to salary? (They could be tied to bonuses or at-risk portions of pay, or could be tied to merit-based pay raises, for example.)
- Do you have a policy of providing longevity increases to ensure that long-term employee salaries keep up with market levels?
- Are the benefits being offered by the organization the ones that the employees value? Are they benefits that will help to attract the types of applicants the organization is looking for?
- Are there policies in place regarding noncash forms of compensation, such as company cars, club memberships, and all other benefits offered?
What other considerations did you find important when setting up your compensation policies? Which ones did you find toughest to answer?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.