Rightly so, most HR leaders are concerned with the ever-increasing pressure to attract, motivate, engage and retain its employees, especially those high potential and key management ones. Accordingly, they implement a wide variety of HR programs that are designed to do just that. However, all HR programs rely on one key assumption – that the majority of employees feel that they are being fairly compensated in relation to the performance results they have achieved and their pay level is equitable both internally with other employees in their job and externally with the outside labor market. To achieve that goal, the company’s salary administration and bonus administration practices must be administered fairly which, in turn, will provide the rock-solid foundation upon which almost all HR programs rely. In the end, if a lot of employees feel that their compensation is not fair or equitable, the benefits of various HR programs, such as onboarding, recruitment, engagement, leadership, management training and skills developments, are likely to be greatly diminished.
Any compensation plan, whether it is for salary or bonus administration, strives to be fair while paying for performance. Paying fairly means that the compensation amount was impartially and honestly determined in an objective manner based on merit without any favor or prejudice.
Any compensation plan, whether it is for salary or bonus administration, strives to be fair while paying for performance. Paying fairly means that the compensation amount was impartially and honestly determined in an objective manner based on merit without any favor or prejudice. Paying for performance means that the compensation amount was determined by a thorough analysis of specific performance results wherever possible, rather than a subjective evaluation by the supervisor. Lastly, external equity means that the compensation amount is comparable to others doing the same type of work in the relevant outside labor market, while internal equity means that the compensation amount is appropriately placed within the salary or bonus range in comparison to other employees within the same job and/or salary range, taking into account any performance differences.
Though existing company practices for salary and bonus administration tend to take precedence, there are several key principles that should be understood and considered for use. Such principles fall into either a general or specific category.
- First and foremost, fair and equitable salary administration is predicated on having accurate salary ranges that reflect the reality of the relevant outside labor market over a given period of time which is typical for a budget year. Without such salary ranges, effective administration of salaries is very difficult to attain.
- Market-priced salary ranges from a reputable source that are appropriate for your exempt professional and management positions (typically nationwide) and non-exempt positions (typically from the local geographic area) are more preferable than those developed from a job evaluation system because of the direct link of the key positions to relevant outside salary data.
- If your company advocates a pay-for-performance culture, there should be some formal or semi-formal performance review policy and practice in place which is designed to evaluate an employee’s specific performance results, especially those at the top two or three levels of management. In any case, the evaluation of performance should be supported by some form of performance documentation. In addition, making an appropriate salary increase recommendation should never be solely left up to the supervisor’s verbal comments, while at least two (and preferably three) upward levels of management review should occur at all times.
- Almost every manager has a natural tendency to want to give his or her employees a pay increase at their regular review time interval unless performance is totally unsatisfactory. When this is not possible, it is much better to give the employee their earned merit increase percentage at an elongated time interval than it is to give him or her a lower merit increase percentage at their regular review time interval.
- During difficult financial periods in which tight salary budgets exist, it is better to withhold or lower pay increases or elongate the time interval between increases for the lesser performing employees in an effort to use the available monies to reward your higher performing employees.
- External and internal inequity situations are best corrected in the Salary Administration plan, though it may take a year or more to correct the entire problem.
- The salary range data will usually be provided as of a particular date. For a company that operates on a calendar year/fiscal year basis, the data will typically be effective as of or around July 1st of the current year. Therefore, the salary range data should be increased to accurately reflect the outside labor market in the upcoming year. For example, if the market is increasing at a 4% annual rate and your company wants to accurately reflect that labor market in the upcoming year, the salary range data should be increased by 4% in July of that year. Utilizing a less than 4% increase will have your company lagging the market while utilizing a more than 4% increase will have your company leading the market.
- The final decision by the CEO of how much, if any, the salary range data should be increased will be predicated on the company’s financial ability to afford any additional salary budget expense. Therefore, all such supportive documentation and recommendations should be coordinated with the company’s CFO.
- The total amount of merit/salary increase for any one employee should be based primarily on performance, with additional consideration for any external inequity as represented by his/her position in the salary range and internal inequity when he/she is unfairly compensated in comparison to lesser performing employees in the same position.
- When faced with both external and internal inequities, give more emphasis to the internal equity problem.
- Though merit increase guidelines vary widely from company to company, the following represents a typical set of recommended merit increases percentages and review time intervals between increases for a company with no affordability issues.
Minimum to Midpoint Midpoint to Maximum
Merit Increase % 3-5% 2-4%
Time Interval 9-12 mos 15-18 mos
- Since the division or business unit head will much prefer to spend the majority of the salary budget monies on the key positions and departments that are crucial to the upcoming business plan, HR can provide valuable departmental position-in-range data, similar to the following, to help achieve that end:
Job # Employees % of Midpoint
Manager 1 101.8
Supervisors 3 98.3
Sr. S/W Developers 2 92.1
S/W Developers 3 91.8
Sr. Programmer Analysts 2 98.4
Programmer Analysts 2 101.5
Programmers 3 99.0
The above data suggests that the Senior Software Developers and Software Developers are significantly behind the market and should be given higher than normal salary increases to help correct the problem. Such a salary action will minimize the risk of these key employees leaving the company.
7. Promotional salary increases should consist of a pro-rated merit increase along with a promotional increase percentage.
- HR Compensation department should work closely with the Finance department to ensure that monies provided by their merit/promotional salary guidelines fit within the company’s financial/budget plan.