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Common Compensation Mistakes—And How to Fix Them

Jen Dewar
May 27, 2021 6:00:00 AM

Compensation is a complex practice with many moving parts. Inflation and demand for specific skill sets change market rates at unpredictable and inconsistent rates. Team members come and go, learn new skills, and increase tenure. Pay philosophies change as companies grow or get funding. 

It would be nearly impossible to get everything right, all of the time. Even the most seasoned compensation teams have opportunities to improve, and know that iteration is key to a successful practice. If you’re ready to level up, here are some common compensation mistakes, and how to fix them.

Using the wrong data to set salary ranges

The competitiveness of your compensation strategy is only as good as your market data. If you plan to pay at—or above—market, but use inaccurate or outdated data sources, your offers may not be as competitive as you think they are. And as the talent landscape gets more competitive, salaries will start increasing faster.

Use two or three credible data sources to set your salary ranges. This might include salary survey data companies such as Radford and Mercer, and self-reported sources such as Payscale and Comparably. It’s also a good idea to get real-time feedback from recruiters, managers, and employee surveys. If compensation is possibly leading to low offer acceptance rates, low employee engagement, or high turnover, it may be time to revisit your salary ranges. Regardless, it’s generally a good idea to update your ranges at least once or twice a year.

Being too lenient on salary negotiations

Salary negotiations have the potential to lead to unfair compensation decisions. Around 70 percent of men and women negotiate their initial salary offers, but 7 percent more men are successful. And when they ask for a raise, women of color are 19 percent less likely than a White man to receive it, and men of color are 25 percent less likely. 

Pay people according to your compensation strategy—not their negotiation skills. A written compensation strategy, complete with job levels and salary ranges, is an important first step. Then use your available compensation metrics and data to make fair compensation decisions at the point of hire, and during each compensation cycle.

When you do negotiate—to close a top performer with salary requirements above your range, for example—make sure you think it through. Have a plan for long-term retention, whether that means you set aside a budget for a raise or earmark some options for a stock refresher. And be careful not to overpay people, as this could result in “golden handcuffs,” wherein a team member won’t leave—even if they’re unhappy and disengaged. 

Too much secrecy around your compensation philosophy

When your team members don’t understand your compensation philosophy, they may not trust your compensation decisions. As it stands, only 22 percent of employees agree they are paid fairly, which can lead to low employee engagement and high turnover. In fact, compensation is often listed as a top reason people leave their jobs.

A little pay transparency can go a long way. Help your team members understand why they earn what they do, and what they can do to earn more. For example, you could suggest a new skill the employee could learn, or a degree program they could pursue. Sharing career ladders is another great way to demonstrate how team members can progress to higher levels of pay, skill, responsibility, or authority.

Pay transparency can mean different things at different companies, so do what works best for your organization. This may include sharing job levels, salary ranges, or even exact salaries for each employee.

Failing to support managers

Managers are fielding compensation questions, but only 29 percent of organizations train their managers to have retention- and satisfaction-critical conversations about pay. This can lead to misinformation and sticky situations for your HR team to clean up.

It’s important to give managers the right amounts of compensation information, in language they can understand, on a consistent basis. To start, managers should be well-versed in your company’s compensation principles. This can help them understand and explain to each of their reports why they earn what they do.

When managers are involved in compensation decisions, make sure they have the right compensation data to make informed recommendations. For instance, pay range penetration can help managers visualize how employees are paid in comparison to their salary band so they can distribute merit-based raises more strategically.

Ignoring pay equity

Two-thirds of compensation professionals say pay equity is important at their organizations, but only 46 percent plan to conduct a pay equity analysis in 2021. If you don’t measure it, you can’t identify potential issues and fix them. Pay inequities can lead to turnover, poor morale, and even litigation. 

Stay on top of internal equity by tracking pay equity metrics like compa ratio and average salary by demographic and intersectional group. If your company offers bonuses or stock options, take those into account as well. 

When you see discrepancies, take immediate action to correct them if you’re in a place to do so. Many organizations make strategic adjustments alongside merit-based raises during regular compensation cycles. This can help ensure that merit increases don’t create new pay gaps or exasperate existing gaps.

Using the wrong tools to manage compensation

If you’re using spreadsheets because your compensation management tool isn’t up to par—or because you don’t have a solution at all—you may be doing your company a disservice. The right compensation management platform can help you use your budget more strategically, improve efficiency, and reduce errors.

The right solution can:

  • Help managers and employees understand how compensation really works.
  • Reduce the time your team spends on compensation cycles.
  • Give you instant insights into total employee compensation—including stock.
  • Produce compensation letters to help you communicate raises, bonuses, and stock option grants with team members.

Final thoughts on common compensation mistakes

With all of the complexities involved in compensation, it’s easy to overlook important ways to ensure you’re using it strategically. But it is probably your organization’s biggest operating expense, and it’s worth the extra effort and investment to get it right. Watch out for these common compensation mistakes—and make it a point to correct them when you can.

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