An integral component of company culture is understanding the compensation strategy that your organization is paying employees. Many employees are asking for transparency. A company can no longer make wage pay decisions based on their geographic location, what competitors are paying, and what an employee was previously making. While this may have been a simplified approach to competitive pay, it is no longer a viable method.
To be competitive in the marketplace, a company’s culture should include having a strategic compensation plan, e.g., one which defines the corporate culture as the philosophy behind the organization’s pay strategy.
With a goal that will meet the organization’s ability to attract and retain quality employees, and one that establishes a culture aligning the mission of the organization to its employees, the following suggestions are best practices to follow to audit the current pay practices and determine if:
- Employees are being paid and incentivized fairly based on the requirements of their position, and the skills and experience they bring to the position.
- The pay is competitive with the labor market and competition for employees is being generated.
- The pay practices follow federal/state/local non-discrimination, pay equity, and wage laws.
Understanding the Wage Requirements
A developed compensation plan should address both Pay Equity and Pay Equality. They are different in the following ways:
Pay Equity – Determines if and why employees are being paid differently.
Pay Equality – Determines if equal work is receiving equal pay.
While this article does not fully address compensation plans in total but ensures that employers are considering basic compliance requirements.
Employers need to be paying at least federal minimum wage (each state’s wage increase laws may be different) – $7.25 per hour for non-exempt employees and $684.00 per week for most exempt employees. Exceptions do occur and your trusted advisor’s HCM resources can provide federal and geographical salary guidance.
Federal wage requirements are slowly increasing. However, to meet the demands of inflation, many states have set their own minimum pay requirements and where state law is higher, employers are responsible for the higher wages. Employers need to also review applicable local/city wage rates to ensure compliance with minimum wage requirements. Minimum wage Laws in certain states such as California are even more confusing:
• Size of the employer may dictate your minimum wage
• Certain cities have minimum wage rates that are higher than the state’s
In consideration of where an organization would establish its market position, Human Resource professionals rely on the following definitions for market placement, according to SHRM:
a. Matching the Market. Targeting the 50th percentile means that an organization wants to pay in the middle of all organizations that have a similar position. In other words, 50 percent of the organizations should be paying less than that market rate, and 50 percent should be paying more than the market rate. “Matching the market” is the formal name for this approach.
b. Market Leader. If an organization chooses to focus on the 75th percentile and take a “market leader” position, it will pay higher than 75 percent of other organizations with similar positions. Organizations competing for employees with specialized skill sets in a tight labor market or organizations that want to be a high payer in the market typically select a marker-leader position. Organizations with less robust variable compensation or benefits programs may also select a market leader base pay position to end up with an overall 50th percentile total compensation program.
c. Market Lag. If an organization chooses to focus on the 25th percentile and take a “market lag” position, it will pay higher than only 25 percent of other organizations with similar positions. Organizations with strong variable compensation or benefits programs, or those encountering financial difficulties, may opt for a market lag position.
d. Lead-Lag. As an additional variation, some organizations may choose to lead the base pay market for the beginning of the fiscal year and then lag at the end of that year. “Lead-lag” is the formal name for this approach to base pay management.
Salary Ranges and Caps
The next determination is where to set the ranges for the positions. Considerations for making effective annual adjustments are an important strategic step for an effective compensation plan in establishing the ranges, bonuses, raises, and COLA. Employers may set salary caps (not including those set by government or labor contracts) which establish the highest salary that an employer will pay for specific positions. Salary caps have pros and cons including:
PRO–Determining and maintaining organizational budgets and establishing equality.
CONS–“Red-circle” jobs reach the top limits in pay for their position, causing retention challenges.
As employers move to remote or hybrid workforces, salary ranges and caps are integral to the geographic landscape of your organization. Employers need to not only consider where the applicants are being sourced out originally but if a replacement position, relocation, or new geographic position is necessary and how do the ranges and caps work within the recruiting strategy.
Organizations are taking time now in the highly competitive job market to review their compensation strategies by at minimum benchmarking their current pay structure. For those who have not established a developed plan, now is the time to do so to ensure competitiveness and to maintain compliance requirements with wage and hours laws and your organization’s internal wage equity.