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The Compensation Conundrum

Many of us are heading into that time of year where the annual increases are given out. For some organizations it will be a fairly simply process – they have set an overall cost of living increase budget (one that they can afford based on their financial circumstance) and everyone in the organization will receive this amount. It is not tied into performance (i.e. merit increase) or any other factor. Other organizations “say” that they have a merit budget and will attempt, through some means, to disperse this budget across their employees based on their performance(s). The problem with this approach is that if you do not have a proper performance based compensation system in place, one that includes employees having specific goals and objectives set at the beginning of the year and measured through key performance indicators, than it is difficult to say you have merit pay. What happens in cases like these is that the increases are subjectively given out based on the perception of who has done well, or worked hard, even though this may not be the case as performance was not measured! The end result is that you have given out a bunch of increases that probably won’t provide any type of ROI for the organization.

PenniesSo, for those organizations that apply a COLA (cost of living) increase, your approach is easy enough to administer; however, I am not so certain that your organization is performance-based, unless you have some other type of financial incentive system in place. For those organizations that have “merit” pay systems and/or indicate that they provide performance based compensation you need to make sure that you are objectively measuring results and rewarding the top performers. For the record, if your average increase (budget) is less than 3%, than you do not have a merit (performance) based system! The pie is simply too small to split up and reward for performance.

The key at merit pay time is to make sure that the monies allocated for these increases are used just for that – merit increases. Far too often I have seen companies inappropriately and inadequately use this budget to address compensation gap issues. You know, the ones that are created by hiring an employee at one salary and then they only receive the standard increase every year regardless of how good their performance is. You then bring on external talent and immediately begin paying them the same or more than your current staff that are performing (because you need to in order to attract them). However, what message does this send to your employees? So then you have these “gaps” that get created and your good performers barely keep up with inflation, in terms of their overall earning capability, while new folks brought in receive starting salaries much higher than current incumbents.

So then what happens? Well, you probably lose a few folks due to compensation concerns and/or some come forward to discuss or even complain. The company then deals with the squeaky wheels and takes from the merit budget to deal with these gaps, thereby diluting the pool of funds available. This is a vicious cycle that once started is hard to recover from. So what should you do?

1) If you have a merit pay system, than make sure you have clear goals and objectives with measurements (KPI’s) attached to each one for your employees. These serve as performance guideposts so you can measure them against these KPI’s (key performance indicators) with pre-determined outcome levels that indicate acceptable, below acceptable and above acceptable levels of performance. (Reward accordingly).

2) Deal with salary inequities in the form of out of cycle increases. Progressive organizations continually look at internal and external market factors and determine which jobs hold the greatest value to them as an organization. Through surveys and quantitative data, they ensure that performing incumbents in those roles are paid at least at the market rate. Organizations with strong compensation practices should NEVER steal from their merit budget to deal with these gaps. Ideally, when these gaps are discovered, the company makes salary adjustments in a timely manner (i.e. proactively) and communicates this to the employee(s) affected.

3) If you don’t have merit pay or don’t want to have merit pay, you need to establish a financial incentive system that once again rewards based on performance in order to drive the business results you are looking for. This may be done in the form of bonuses, lump sum (one time) pay outs, increased paid time off, etc. There are creative ways to do this depending on your budget, but you must be clear on how you are going to measure and reward (compensate).

4) Above all – COMMUNICATE. Communicate to your staff what you are trying to achieve with your compensation system. Communicate the goals and objectives to them. Communicate how their performance will be measured and how they will be rewarded. Communicate how you ensure salaries are measured through surveys and how you ensure they align with market pay. Communicate how jobs are valued through your job evaluation process. If you have no budget for merit increases, communicate the decision behind why there are no increases but what is being done (and needed from employees) to better position the company for next year.

Compensation is a sticky issue and a real delicate matter for everyone involved. By being transparent, objective and communicative as a manager and as an organization, you can go a long way in resolving the compensation conundrum. As always, I welcome your thoughts and feedback.

Image courtesy of Grant Cochrane/ FreeDigitalPhotos.net

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