Compensation mistakes

The biggest compensation mistakes companies can make

One of the biggest costs a company has is the compensation budget. When operating with 30% to 70% of the company turnover one mistake can cost a lot. Part of the solution is to acknowledge what are the main mistakes a company can make with their compensation budget. Let’s dive in:

  1. Not having a compensation strategy & policy – When you pay your employees based on their negotiation skills or according to your intuition you will make a lot of mistakes. These mistakes will most probably generate phenomenons like: high attrition of high performer employees, lack of motivation across the company, lack of pay equity among similar jobs, high retention of low performers and the list can continue. All of the phenomenons generated by the absence of a compensation strategy and policy will result in huge costs. To avoid this from happening, create a compensation strategy and policies with ranges and clear rules.
  2.  Having an outdated compensation policy – First of all, to be clear, a compensation policy has to be characterized by two factors: internal equity and external competitiveness. Outdated means not measuring/updating regularly one or both of the above factors. Paying your employees in a competitive way does not equal internal fair pay and vice versa. Constant analysis and market comparison is necessary.
  3. Lack of transparency – A compensation policy has to be transparent. You need to proactively communicate elements of your strategy to all employees. In the implementation of the compensation policy, managers are of a crucial importance. A different communication strategy should be designed for this employee group. Depending on the context you are in, different communication strategies can apply. Communication is a process and in each step you should decide:
    • what you must communicate
    • what you want to communicate
    • what you are willing to communicate
    • what you are not ready to communicate
    • what you will not communicate
  4. Same merit increase to all employees – Offering the same percentage of increase to all employees is far from efficient. This approach can seem tempting as it’s the easiest solution but the effects will most probably deepen the issues you have. To identify the percentage of increase you should do a compensation package diagnosis to identify risks. An internal equity index and external competitiveness index should be calculated for each employee. After a thorough analysis of these indexes you need to create a matrix with merit increase percentages for different employee categories.
  5. Having a common pay approach towards all employees – A common compensation policy with no personalization for different employee groups can have negative outcomes. This type of approach can lead to a lack of motivation of the high performer employee group which will generate employee turnover and at the same time it will encourage the low performers to remain in the organization by overpaying them.
  6. A fake link between variable pay and performance – If asked most companies will say that performance within their organization is rewarded accordingly, some of them will even have performance as one of their values. Reality shows that few companies walk the talk. Creating a compensation and benefit policy will sparkle for sure some really constructive discussions among the board of the company regarding:
    • performance management
    • what is expected from different positions
    • which competencies should the job holders have, etc. Don’t be afraid to have this conversations, it will be worth it.

Our Compensation and Benefit Course will teach you step by step how to overcome this issues and much more. Take a look at the course content