3 Compensation Best Practices for HR Pros

“We’ll let finance handle that!”

As an HR generalist or even as an HR manager, you’ve maybe heard (or said) that phrase a time or two, specifically when it comes to compensation. But HR pros need to stop saying—and thinking—this way!

Most of the HR teams I’ve worked with haven’t had any experience with compensation planning, yet they’re expected to be knowledgeable about it. They may be involved with the budgeting, but not the philosophy or process around it.

This is often the case for companies that choose to spread out compensation equally—for example, all employees get a 3% raise. When, as in this example, a compensation plan is devoid of any strategy, employees can be left unmotivated. They think, “What’s the point in going above and beyond if the bare minimum gets the same increase?”

I’ve seen excellent employees leave companies for this very reason.

Other methods, like determining bonuses based on performance, can also backfire. In my previous position as an HR manager in the manufacturing industry, all employees received a bonus based on company performance. This wasn’t motivating because the scope of work among teams was too diverse, leading to a mediocre bonus that created waves within the company. This kind of pay-for-performance bonus didn’t work here, but in many companies, it does work well.

Ultimately, there’s no one-size-fits-all merit increase policy—but your HR team can avoid these issues (and many more!) with strategic compensation planning.

In this article, I’ll discuss three compensation best practices when determining guidelines for your organization as well as a few suggestions for effectively communicating guidelines to employees.

3 Compensation Best Practices for HR Teams

1. Develop a compensation philosophy.

A compensation philosophy is your company’s goal for how you want to pay, compensate, and reward your employees. For example: “We want to pay right at the market,” or “We want to be the premier employer in our industry.”

Identifying a compensation philosophy is the first thing our team does when we work with clients. A philosophy is crucial, because it is the building block for how and why you pay your team the way you do. All the work we do for clients points back to the goals identified in their compensation philosophy.

If you have a compensation philosophy—and it aligns with your company’s goals—great! If yours is outdated, review and update it. (You’ll know your philosophy is outdated if you read it and say, “That’s not what we want to do with pay!”) If you don’t have one, create one.

At MorganHR, the process of creating a compensation philosophy for our clients includes interviewing stakeholders, formulating that information into goals, and ensuring the client’s vision and values are in line with what we’ve discovered.

We have a robust project management plan: For about 12 weeks, we’ll work together to get to the root of what’s important to stakeholders so we can ensure those things are represented in the compensation guidelines. Developing a compensation philosophy is just one element of what we do. Our clients are matched with a point person, but our whole team has eyes on your project to ensure your company gets the best, most accurate data.

2. Do a “job worth” hierarchy.

A job worth hierarchy is what it sounds like—it shows what each job is worth in dollars to an organization (Hint: it’s not the same as an org chart).

Using this hierarchy, company leaders can determine if compensation makes sense for each job—for example, if a senior training advocate should, in fact, be at the same pay level as a junior payroll advisor.

Using job hierarchies is better for strategizing pay than looking at specific employees, because if an employee leaves, HR teams and leaders have insight into what’s necessary and expected from a role, not of the specific person within the role. Job worth hierarchies help organizations pay to the job, and not to the person.

This allows flexibility in pay, too. For example, if you know a job is worth $50-60,000 to the company, someone doing a great job in the role can make closer to the $60,000 mark, whereas a new hire can start at $50,000.

You can create a hierarchy on your own, but it’s not the simplest task if you don’t have tools and knowledge to do it accurately. However, it’s also time-consuming and requires a level of expertise many HR pros simply don’t have.

Don’t feel bad about that! I couldn’t have done this myself when I was a manager. In the midst of approving grants, running payroll, and a million other things, there was little time to devote to creating a hierarchy. And it’s important for this step to be right, which means it takes time to do and redo.

If you don’t have time for this, or you don’t know that you can fix it, have a consultant do it. Job worth hierarchies done by experts help you combat title fraud—and the resulting angst it creates—by impartially defining levels of roles. Identifying that a Manager-titled position has no control of budget and no direct reports (which makes them a manager of process and not a manager of people), employees clearly understand where their job lines up with the data. When HR teams and managers can explain why Role X makes more money, they won’t feel panicked when answering money-related questions. Instead, they can hand over a manual and show the compensation guidebook, which clearly states what it takes to earn a higher role.

3. Benchmark jobs; do a position and range report.

Job worth hierarchies lead into this step. If you’re going to match the market, you have to benchmark jobs. Once jobs are benchmarked, MorganHR does a position and range report, which shows what jobs fit in which pay levels. Here’s an example:

• Accountants are in pay level 15 (a level we’ve created) which means their pay level should be from $X-$Y.
• We have 20 accountants at Company X, here’s where they fall: Two accountants fall below this range. One started below the range; so we’ll consider a plan to get them up to the range. We have two accountants who are well above the range. They have more duties, which means they either have a different job than what we’ve identified, or they have an extenuating circumstance (one has been here for 30 years), and we’ve documented that this is OK for the following reasons.

This is our final deliverable, which allows our clients to see who falls below or above the levels dictated by the company’s philosophy and market research. This step helps HR pros plan for how to make sure the right employees are in the right ranges, and make any adjustments needed.

Why do compensation best practices matter?

Simply put, having these best practices in place when creating your compensation guidelines shows the health of your organization.

If you haven’t gone through this process, either yourself or with the help of an expert, you can get compression and inversion—new hires making more than tenured employees or making the same amount as their managers, etc., which leads to tension in the workplace and poor morale.

I suggest you review the compensation plan and philosophy of your organization annually for both current and new employees to ensure the payroll portion of your budget is accurate (and that you’re not digging yourself into a hole).

If you need help with any aspect of compensation—from identifying and clarifying your compensation philosophy, to benchmarking and alignment to compensation structure and manager compensation training—reach out to us at MorganHR!

Our team has helped many organizations achieve pay transparency, and we’ve seen positive culture changes as a result—and we can do the same for you! Get in touch with our team today to learn more.