The cost of competing: An equitable compensation strategy

It seems everyone is talking about employee compensation trends right now, and for good reason. The upheaval created by COVID-19 generated an incredibly competitive job market, and job candidates are calling the shots on their compensation and benefits expectations. With the cost of living rising in the current economy, staying competitive with compensation has become all the more challenging.

Although pay inequity has been a decades-long conversation, the pandemic exposed the proliferation of the problem on a global scale. Across the world, companies were forced to acknowledge how existing inequities spurred the exodus of millions of women from the workforce — now dubbed the “she-cession”–and the disproportionate hardship experienced by historically marginalized workers. The new demands of working during the pandemic – more virtual meetings, increased after-hours workload, and the challenge of working from home while caring for children who were also in the home – only further taxed workers of all genders. Now that the dust has settled, these same workers and many others are rightfully asking employers to do better.

In response, competitive employers are making changes, starting with their compensation strategies. Specifically, employers are revisiting their established pay scales for both open roles and currently filled positions. According to a recent XpertHR survey on compensation practices, 78% of employers rated offering better pay as a “high” priority this year, while 68% have prioritized ensuring pay equity.

A comprehensive compensation strategy is an indispensable tool that employers use to retain or grow their workforce. Importantly, compensation strategies can also be used to ensure that wages and benefits are equitable. But developing such a strategy is complicated; it is dependent on data and must account for relevant employment laws, budget, and compensation trends in the marketplace. Read on to discover how to develop and maintain a compensation strategy that will help your business remain competitive and an employer of choice.

Compensation philosophy 101

Before you develop a sweeping compensation strategy, it’s important to have a strong understanding of your company’s overall compensation philosophy. Put down the Socrates and Nietzsche; this effort involves articulating a company’s values and compensation positioning. Does your business lead, lag, or match current compensation trends? Your senior leadership team should establish a compensation philosophy that aligns with corporate goals, the industry and the market. This will help HR leaders set consistent salary ranges while meeting overall business objectives.

Let’s not forget data! Increased analytics capabilities have opened the door for companies to have a more meaningful and holistic approach to equitable compensation strategy. In fact, XpertHR data indicates 93% of companies endorse analytics for making pay decisions, although just 38% have actually done so. Employers can and should leverage internal and external demographic data and relevant employee information from the inception of their compensation strategy.

Job analysis

Developing a compensation strategy will also require you to review current and potential jobs including required duties, educational and skill requirements, and experience needed to perform each job adequately. This analysis will serve as the foundation when you develop each job description, job structure and pay scale.

The comps of compensation

Compensation is a compelling tool in your recruitment and retention efforts. A benchmarking initiative that analyzes both internal and external compensation data will help ensure your HR team is familiar with market trends and how competitors are using compensation to recruit top talent. It’s critical to know where your organization stands against your competitors’ compensation and the broader marketplace. Spend time researching salary averages for your industry and required positions. Aside from paid compensation benchmarking tools, the U.S. Bureau of Labor Statistics is a good source of information. Compare compensation for your organization’s main roles and those posted by other employers — ensuring that job descriptions and candidate requirements are comparable.

While analyzing compensation data, watch for internal and external differences in pay among key demographics in your workforce. Demographics include race, color, sex, LGBTQIA+ status, national origin, disability, veteran status and religion. Other demographic groups you may consider include working parents, neurodiverse employees, first-generation college graduates, and employees with diverse education levels and socio-economic backgrounds. Take note that you may discover intersections among demographics. If you find patterns or gaps in pay, analyze potential internal and external contributors and address them head on.

Develop a budget that makes sense

Wouldn’t it be great if you could pay prospective employees whatever their hearts desired? Unfortunately, your compensation strategy will require you to thread the needle of meeting your organization’s financial objectives while offering pay and benefits that appeal to job candidates and current employees. Consider payroll, taxes, bonuses, commission and benefits while developing your compensation budget. If your total compensation exceeds the overall budget, consider including low-cost benefits like stock options or flexible work arrangements in your compensation strategy.

Job structures and pay scales

A job structure groups together a series of roles that are similar by either job type or function. These structures rely on similar factors like knowledge, skills, and experience. Within each job structure, you should establish different grades that classify roles based on employee experience, education, training, and performance. A compensation strategy with defined job grades allows a company to establish a pay scale for different but related roles. For example, the compensation structure for a chief financial officer would be vastly different from an accounts payable coordinator.

Related: Analyzing and increasing employee pay structure

Reviewing job structures can also help you identify inequities related to promotion and career development. For example, you may notice that women were not promoted at the same rate as men in a particular department. Or, you may notice that a certain demographic is overrepresented in a particular job role. These types of inequities may not be as easy to identify. Once unearthed, however, they can help diagnose broader patterns of pay inequity in your company.

Keep up with the law of the land

In addition to a compensation philosophy and budget that meets the company’s bottom line, it’s important to also talk about the legal implications of a compensation strategy. Employment laws vary widely from city to city and state to state. HR professionals need to stay compliant and be familiar with laws that affect compensation. The Fair Labor Standards Act, Equal Pay Act and Pregnancy Discrimination Act are just a few of the federal laws that affect compensation practices. State and local laws may also define standards like minimum wage or require pay transparency in job advertisements.

Some companies remain compliant by creating a single compensation strategy that meets universal compliance, while others may choose to establish compensation practices that reflect the laws in each jurisdiction. If you decide to address each jurisdiction individually, keep in mind that diversifying your compensation strategy can lead to inequities depending on where employees live. For example, if your company provides the but not in cities that do not require it, this may result in inequitable compensation if employees are not otherwise compensated.

Gain stakeholder approval

Once you’ve developed a compensation strategy, it’s time to get the blessing from your top executives. Develop a report that summarizes your proposed compensation strategy, the process you implemented to develop the strategy, the challenges that your team experienced while developing said strategy, and how the proposal aligns with the executive team’s compensation philosophy.

Create transparency through communication

Once a compensation strategy has been approved by your executive team, it’s important to share the news with existing employees. Employees will likely ask, “How does this benefit me?” Announce the goals and objectives of the strategy, including those related to equity, and address any concerns and questions employees may have. Your team may consider several communications approaches — an in-person meeting, a company-wide email, or a printed memo — to ensure employees receive the message and know who to contact with any questions.

Full transparency about equity and your compensation strategy can help reduce concerns and create a better understanding amongst your employees. Some themes to articulate in your messaging include local, national, or global trends and the changing demands of your workforce. It’s important to be open about the skills needed at your form or for a given role, and the skills your organization will rely on in the future.

In other words, when communicating the company’s pay equity goals and objectives, ensure that employees understand what it means for the company and for them. Employees should understand that pay equity means ensuring fairness, addressing skills gaps, and moving the company forward. To that end, consider communicating the company’s direction, how pay equity will contribute to the company’s business objectives and mission, and how pay equity aligns with the company’s values.

The three R’s: Review and revise regularly

As with any strategy, it’s important to regard your compensation protocols as a “living, breathing tool” and edit accordingly to reflect changes in the marketplace or employee expectations. Regularly review your compensation strategy and outcomes to ensure they still align with overall business goals while supporting your recruitment and retention efforts. Consider tracking and measuring metrics related to talent acquisition costs, job acceptance rates, employee retention, productivity and compensation budget.

Natasha K. A. Wiebusch is a former practicing attorney and HR compliance and training specialist who covers benefits, compensation, workplace flexibility and the future of work for XpertHR.