Compensation costs are often one of the largest, if not the largest cost for most companies. If managed right, your compensation programs will attract the best people and motivate them toward the behaviors you need for your strategy. However, most companies have no framework for how to pay their people. There’s often a reactive “squeaky wheel” policy that only leads to greater pay disparities and compression. How do you fix this?
Best-in-class companies manage compensation with the same rigor as their other expenses. They document what they need their people to do and use rewards to reinforce top performance. They acquire competitive benchmark data to understand what their peers pay. And they make strategic decisions about where they want to pay below, at or above their peers.
To make these things happen, HR professionals lead key compensation processes: Job analysis, Job evaluation, market pricing, and pay-for-performance. These are critical for effective compensation. However, even when these processes are in place, compensation teams often struggle to keep up with demands. This can include, for example, frequent requests to re-classify jobs and increase pay for select employees. The challenge is: how do you make sure that these programs are effective? How does HR proactively influence the firm’s pay practices, instead of just reacting to demands?
One way to become a compensation influencer is establish yourself as a strategic partner. Meet with business leaders to understand their performance goals, and how changes in the industry impact their decisions. This will show that you understand how the business works and its strategy. F or example, when I was a compensation manager at a super-regional bank, I subscribed to the Wall Street Journal, looked for key articles related to the business we supported, and shared these with my team. Sometimes, we’d discuss what we read with the bankers and asked for their feedback. When the time came to design incentive plans, we understood the competitive pressures facing the business. Similarly, seek to understand the pace of change in the market. This will help you advise the business on issues such as whether to build or buy talent, and whether incentives should be short- or long-term.
Another way to influence compensation is to develop a passion for understanding the jobs in your industry. This includes not only the jobs as they exist in your company, but at your competitors as well. Are there special demands made on your employees that might make a move to a competitor more attractive? This could put upward pressure on your compensation. Become the subject matter expert on the roles that drive the company’s success.
One helpful exercise is to meet with business leaders to build consensus on the internal value hierarchy of your jobs. Create a list of the main jobs and ask leaders to rate the jobs on key features, such as decision-making responsibility, supervision level, work conditions, and other critical factors. Get all the leaders in one room and discuss where they rank each job on its average score. This is often the first time these leaders have come together to discuss all roles holistically. It’s an eye-opening experience, and it builds agreement on how jobs should be paid relative to each other. It also builds consultative credibility for you as the compensation expert.
Finally, we all know that successful companies reward their top performers. Many companies have compensation programs in place to achieve this, such as annual merit increases and incentive pay. And yet, many companies (and their employees) are dissatisfied with the results. Leaders fail to differentiate performance, and instead spread the rewards like peanut butter. This is often because leaders are afraid to deliver tough messages, such as where performance needs to improve. For this reason, the compensation team should train leaders on how to make effective pay decisions. This can include exercises where leaders provide rewards to a fictional team, and practice messaging those awards.
In sum, compensation should not be a reactive process. HR professionals can proactively guide compensation philosophy by building a strategic relationship with the business, and also by leading key activities that establish consensus around jobs and rewarding top performers. Be a compensation influencer!