Compensation Structures Require Firm Foundations

ORLANDO, FLA.—An effective compensation system supports the organization’s business strategy. It’s externally competitive, legally compliant, compatible with the culture and appropriate for the workforce. Importantly, it’s also perceived as fair, explained Bruce Elliott, ‎manager of compensation and benefits at the Society for Human Resource Management (SHRM), who led the 2014 SHRM Annual Conference & Exposition’s popular seminar on “Compensation Essentials” on June 22.

Elliott, whose past positions include senior director of global total rewards at Solera and director of compensation at Experian, provided a wide-ranging overview of pay basics—and beyond.

Start with Philosophy

Although any compensation structure involves a multitude of moving parts, everything begins with the pay philosophy—a formal statement that identifies how your organization views and manages pay, Elliott explained. It should be based on an awareness of your organization’s mission, strategy and culture, workforce demographics, and external competitive considerations. One key point, for example, would be whether the organization intends to pay at, below or above market rates.

Generally developed by HR in collaboration with the executive team, start by:

• Stating the goal of the compensation program.

• Defining the competitive market position of the organization.

• Determining how the organization plans to pay and reward based on business conditions, competition and ability to pay.

Developing a pay structure with grades, range spreads and bands is a challenging process under the best of circumstances, but a sound philosophy provides the foundation on which everything else is built, Elliott noted.

Keeping Compliant

There are a myriad of pay laws at the federal level, and individual states—particularly California—often add their own layers of legislative complexity. To keep compliant with various statutes, Elliott advised periodically auditing plans for sex and age discrimination, for instance.

Among HR professionals, many still stumble over applying the Fair Labor Standards Act (FLSA), Elliott said.

“If they are new to the field, they may lack the confidence and credibility to push back against managers eager to avoid paying overtime” by misclassifying employees as exempt from the law.

Since employers bear the burden of proof in FLSA suits and the level of damages can be frighteningly high, HR must not only make its case but stand its ground, or put the organization at risk.

In particular, the administrative work exemption, in which an exempt worker’s primary duty must include the exercise of discretion and independent judgment with respect to “matters of significance,” is a tripping point for managers and, often, HR as well, Elliott warned.

“Walk managers through the exemption tests” for professional and administrative positions, he recommended, and counter popular misconceptions, such as the view that high compensation alone exempts an employee from overtime.

Communicate Effectively

The most misunderstood aspects of pay, Elliott observed, involve variable incentive plans and how they work.

“Employees ‘get’ salary and benefits, but not how their bonus works and how it is linked to performance. Communicating this is where most companies fall down.”

Employees may also feel that they are owed a raise, frequently knocking on HR’s door to ask, “Why isn’t my pay higher?”

The best response is to “show a direct line of sight from the job description back to the market,” Elliott advised. “You want to leave employees feeling they’ve been awarded in an equitable way.”

If an employee is “red circled” at the top of their position’s pay range, with limited or no base salary increases available, explain that’s what happened. Incentive bonuses, equity grants (at public companies) and nonfinancial recognition might be appropriate, and employees can be encouraged to strive to move forward by taking part in professional development opportunities.

But Elliott advised against allowing ad hoc exceptions that increase base pay for a red circled employee but not others at the top of their pay range, as that could be seen as discriminatory and invite lawsuits.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.