In a study from HCI, Human Resource (HR) leaders candidly shared about building a sustainable and strategic HR function. Ninety percent know they need to be more strategic, but 49 percent don’t know what to do to get there. Why not start with compensation?
Compensation is your organization’s biggest operating expense. It can also be your organization’s competitive advantage. The way you pay people indicates how you value them, and can impact your ability to attract, retain, and engage the people you need to meet your business goals.
Compensation cycles are a good opportunity to put in place strategic compensation practices. They can also be such a headache that most stakeholders just want to get them over with. But you can have it all. You can create a more strategic, efficient compensation cycle with planning and foresight.
As your company’s people expert, you are uniquely positioned to be a strategic advisor to your executive team. This holds particularly true for the Chief Financial Officer (CFO), who manages the company’s top- and bottom-lines. Compensation is likely your organization’s biggest line-item expense. It requires a strategic approach to maximize return-on-investment.
Let’s say you recently received updated compensation market data and corresponding updated salary bands. Now you need to make recommended adjustments during your upcoming compensation cycle to bring employees in-band. Get buy-in from your CFO by sharing turnover data by demographic, and the estimated cost of that turnover. Quantify the loss further by sharing how many candidates have declined offers against higher competitive offers, and the associated cost of vacancy for those positions. Share with them the value of using compensation management software to efficiently allocate and manage budget – both during and after the compensation cycle. Keep them looped in every step of the way so you can get the program investments your business needs.
Compensation cycles are complex, with lots of moving parts and many different people involved. Promotional increases (98 percent) and merit increases (95 percent) are the most common type of salary increases. The next most common adjustments are market adjustments (84 percent) and internal equity adjustments (71 percent).
Companies often begin with a simple budget and manager recommendations. Aligning those recommendations with company goals and values is a lot to track and organize. Late nights managing last-minute changes are the norm for HR during a compensation cycle. It’s easy to make mistakes that require later correction.
A staged approach could be both simpler and more effective:
Most companies aren’t very transparent about pay, and it’s leaving a bad taste in employees’ mouths. Only 42 percent of companies share information regarding the design of their pay program, while 38 percent share the base salary range for the employees’ pay grades with them. Given this information, it’s no surprise that only 45 percent of highly compensated employees feel they are fairly paid.
Build a plan around how transparent your company wants to be with regard to compensation. Then, train managers on how to have compensation conversations with their direct reports. At the very least, each employee should understand why they were given their allocated increase, and how they can earn the next one. Strong employee communication increases satisfaction and engagement, which increases productivity and profitability. Without great communication, the work you’ve put into a thoughtful compensation strategy won’t land where it counts.
Spreadsheets are still the most common tool used for designing salary structures, communicating salary ranges internally, and administering pay. HR teams may struggle to get budget for technology updates, given the label of a “cost center.”
Running an efficient compensation cycle can help secure buy-in for other HR-led programs and technology. Even better — a strategic approach to compensation elevates the visibility of HR as a key partner in your company's success.
Want to learn more about executing a better compensation cycle in 2020? Download our eBooks: