Conducting an Effective Compensation Analysis

Compensation is likely your organization's biggest operating expense, and it’s important to track and optimize how it’s used. If allocated poorly, it has the potential to cause employee distrust, disengagement, and turnover. This could be detrimental, as 26 percent of the workforce is considering switching jobs in 2021.

A compensation analysis can help you use your budget strategically, so you can reward your employees fairly and consistently.

What is a compensation analysis?

A compensation analysis is a review of employee pay in relation to an organization's pay philosophy. It often takes into account both internal equity and external competitiveness to ensure fair pay that can attract, engage, and retain talent.

The results of this analysis may identify team members deserving of a strategic compensation adjustment more aligned with company values or the law. Adjustments are often made during a forthcoming compensation cycle, in addition to any merit-based raises.

It’s a best practice to run a comprehensive compensation analysis once or twice a year, as new hire offers, raises, promotions, and acquisitions can all contribute to compensation misalignment. Identifying and addressing these issues on a regular basis can mean smaller and fewer adjustments over time.

Why are compensation analyses important?

Compensation analyses help organizations identify potential pay issues, so they can be corrected. This has many benefits, including:

• Employee retention. Compensation is one of the most common reasons team members cite in their decisions to change jobs. A compensation analysis can lead to more fair, competitive pay, so compensation isn’t a significant factor in a team member’s decision to quit.
• Talent attraction. Offering fair, competitive compensation can make your company more attractive to job seekers—especially to top performers who have many choices around where they can work. While compensation certainly isn’t the only consideration, it absolutely factors into a candidate’s decision to apply to a role and accept an offer.
• Compliance. Wage discrimination is illegal in many jurisdictions, and may lead to fines, litigation, and a damaged reputation. A compensation analysis can help you identify pay inequities so you can address them and maintain compliance with the law.
• Higher employee engagement, productivity, and loyalty. Eighty two percent of workers feel more engaged and fulfilled by their work when they are paid fairly, and 81 percent say they are more productive and loyal to their employers. Communicating about your commitment to fair pay and sharing your process to achieve it can help your team members trust that your compensation decisions are fair.

How do you conduct an effective compensation analysis?

The first step in conducting an effective compensation analysis is to review your salary ranges. You want to ensure they reflect your compensation philosophy and account for current market trends. 

Then run a compensation analysis to identify any team members who may need your attention. Drill in to things like:

• Employees outside of band. Green-circle team members below range, and red-circle team members above range. Investigate each individual case to determine an appropriate course of action. For instance, a team member at or above the top of their salary range may be due for a promotion that would bump them into the next salary range. If that’s not an option, perhaps a spot bonus or stock grant may be more feasible.
• Salary band adherence by tenure. Tenured employee compensation may fall behind as new employees join the company at higher market rates. This is a form of salary compression, and it should be addressed. Look at salary, bonus, and stock to determine if there are any outliers that require your attention. For example, a tenured team member near the bottom of their salary range could be under-performing, or may have been left behind due to management changes. Investigate any team members who appear to be out of place to determine if further action is needed.
• Compensation by ethnicity and gender. Take a look at how your pay distribution compares by ethnicity and gender—and be careful not to make excuses if you find discrepancies. For example, an analysis might find that Latinas are the lowest-earning group. A company may justify this lower pay by citing that Latinas hold mostly individual contributor level roles in the organization and that each team member is compensated appropriately for their job level. Though this may be technically correct, it falls short of truly leveraging the information discovered in a compensation analysis. In this case, the analysis could guide the company to create programs to support, mentor, and promote more Latinas into higher-paying roles. 
• Stock vesting. If your company offers stock, pay attention to who is vesting and when. Fully vested team members are less incentivized to stay, and may have more to gain by seeking out new opportunities. A well-time stock refresher can encourage tenured team members to stay onboard and continue contributing to your company’s success.

When you find and address compensation discrepancies, communicate about the changes with your team members. Employees should understand what they earn, why they’re compensated that way, and when changes take effect. A compensation statement can help with this.

Final thoughts on conducting a compensation analysis

A compensation analysis can ensure you’re managing your budget strategically to attract, engage, and retain the talent your organization needs to meet business goals. Work this process into your compensation cycle timeline so you’re able to make important strategic adjustments before merit-based recommendations. 

An analysis can be a lot of work to complete comprehensively and correctly—but the right tools can help immensely. Compaas connects with your existing HR tech systems and gives you instant insights into total employee compensation so you can run an effective compensation analysis.