Compensation Systems Pitfalls and Problems

by Mike Neubauer

Compensation,  Member Matters

Salary can be one of the most contentious topics HR helps managers deal with. Many managers are not comfortable with questions from employees about salaries. Especially the dreaded, “Why does Sally make more than I do?” Now, with the labor market very tight, starting salaries are creeping upward, causing wage compression between long-term employees and new hires. All of this can lead to tough questions about the how and why of your pay philosophy and your pay system.

Some companies have tried to discourage employees from discussing wages, to avoid the tough conversations and disgruntled employees. Under the 1935 National Labor Relations Act, not only can employees discuss working conditions, including wages, but it is illegal for a company to prevent these conversations.

To add to this, Colorado has passed a law that requires wage equity among equivalent jobs. This will inevitably lead employees to ask, “What is equal work?” The new law, which goes into effect, January 1, 2021, will add several levels of complexity to these salary discussions.An additional section of the law requires that for positions posted internally, the posting must include the salary range.

At this point, some of you are asking if it is too late to start a career in accounting. However,part of what keeps HR so interesting is working difficult issues with conflicting rules, policies,and strategies. There are several best practices that make these conversations and questions less difficult to have and manage.

This all starts with a good review of your pay system, and the philosophy behind it. Do you have a written policy that states why you pay at a certain percentile of market wages? Are certain jobs identified as being critical to the success of the organization and therefore worth paying a higher percentage? The philosophy should reflect and guide your policies on recruiting and retention. Is higher turnover OK in certain positions? Does this philosophy reflect and support the organization’s mission and values statements? Does your compensation philosophy support equal pay for equal work?

A strong written compensation philosophy is a good start but it needs to be actionable. The first part of this is a good understanding of, for each position, what are the different roles and deliverables. Complete and thorough job descriptions can provide the documentation to explain why jobs that—on the surface—look similar actually have different requirements.Good job descriptions make the recruiting and interviewing process easier and with better hires.

The next best practice is to conduct salary-bench marking surveys. Bench marking ensures you are competitive in the marketplace for talent. It is also important for employee retention.Employers Council annually conducts an extensive compensation survey for our members and, as members, you can review and download those surveys to use for your own bench marking. Employers Council also provides market bench marking to those too busy to do their own.

For our Colorado members, now is a good time to do an internal equity analysis. This allows you to make any corrections to your compensation system before the new law goes into effect. It is also evidence of acting in good faith on pay equity. Because this is a topic of national interest and there have been several attempts at the federal level to pass pay-equity legislation, it is also a good idea for our non-Colorado members to review their pay-equity practices.

Compensation systems play a large role in attracting and retaining talent, managing organizational costs, and ensuring legal compliance. It is worthwhile to do a more thorough than normal review of your system. Changes in the law, in the labor market, and in the way younger workers are viewing work in general make this an important part of how HR becomes that strategic business partner.

About the author
Mike Neubauer