Compensation is likely to be a business’ biggest cost. Making sure those dollars have big bottom-line impact is critical, advised Stacey R. Carroll, SPHR, director of customer service and education at PayScale, a Seattle-based pay consultancy, during her session “Aligning Your Compensation Philosophy with Business Priorities,” held June 27, 2011, at the Society for Human Resource Management's (SHRM) 63rd Annual Conference & Exposition in Las Vegas.
“I am on a mission to eliminate the stupid things we do in compensation, beginning with across-the-board pay increases,” Carroll declared. Carroll recommended key steps to turn compensation into a driver of business success. These include:
Know your business. Read—and understand—the company’s balance sheet, income statement and cash flow statement. “If you don’t understand something, ask someone, or Google it,” she advised. Comp plans can be particularly sensitive to cash flow, she noted.
Analyze the state of your compensation program. This involves benchmarking the organization against reliable market data specific to location, industry and size. Next, draw some conclusions: Where do you sit relative to the market? Where are you most vulnerable? Who is being rewarded in the organization? “It’s imperative to benchmark your organization against reliable market data,” she stressed.
Meet with senior leadership. “Comp is not an HR program. We don’t own it,” Carroll said, given that the size of pay budgets is likely to be set by the CEO and CFO and that senior management can veto pay structure changes that they don’t understand or buy in to. Also, any change in the comp program must be run through the business leaders if managers are going to come onboard.
Create a compensation philosophy that supports the organization’s mission. “Set pay ranges, and don’t be afraid to ‘red circle’ employees who have reached the top of their range and are no longer eligible for base pay increases,” said Carroll. As a warning, she gave the example of an administrative assistant who has been with the company for 30 years, who receives a raise each year and who now earns $89,000.
Questions HR should ask in terms of strategy development include, “How competitive do we want/need to be?” and “What is the appropriate mix of compensation elements?” Drilling down, ask, “What positions are going to have the biggest impact on the company’s bottom line?” and “What positions are the most difficult to fill?”
When shifting away from across-the-board increases and toward pay for performance, companies might see increased turnover, “but not among your top performers,” Carroll noted. “Jobs are not equal—targets should not be, either. Pay ranges should be designed relative to business goals.”
As a result, “some jobs may be paying in the 90th percentile—well above market—if the business strategy depends on top talent and outperformance in those areas. It might make business sense to pay other jobs at market (50th percentile) or less.
“Pay for the behavior you want, in alignment with company goals,” Carroll reiterated. “Prepare a business impact analysis, and sell these changes to the organization’s decision-makers.”
Carroll gave as an example the challenge of designing a sales incentive plan at a company that is trying to grow fast and is cash-sensitive. In that case, it might be best to base incentives on increasing profits (more sales while holding costs down) and customer renewal and retention.
Once management has agreed to a compensation structure tied to business priorities, work with divisional heads to redesign incentive programs in alignment with company goals.
The final step: communicating with employees. “Know what you are communicating,” Carroll advised. “Hone your messages with the right amount of detail, give the big picture, describe the process undertaken, and tell employees what they can do to affect pay.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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