why do we need a compensation policy

Why do we need a compensation and benefit policy?

As I stated earlier having an outdated compensation policy or none at all, can be a very expensive mistake a company can make.
Usually companies that have issues within their comp & ben policies experience:

  • High voluntary employee turnover rate
  • High absenteeism / overtime rate
  • Low retention of entry level positions
  • Low engagement survey rates
  • High rates of employment offers refused, especially by the first option candidate
  • Performance rating decrease

So, if you are experiencing some of the above phenomenon’s it would be a very good idea to make a diagnosis of your compensation & benefit policy. Often times companies hesitate to turn their attention to compensation & benefit for the issues within the companies. The main reasons for this are:

  1. Lack of compensation & benefits knowledge and skills within the HR department
  2. The belief that such exercise will cost a lot from the perspective of the salary increases associated

For the latter, there are a series of very clear calculations that can highlight the fact that it is more expensive not to develop the comp & ben policy than to do it. In our process of democratizing HR best practices, we have created in our HR Academy, a learning path that teaches you step by step how to make a Comp & Ben diagnosis.

Pandemics, crisis, prosperity, either way you need a compensation & benefit policy. Adapted to the socio-economic context and to your strategy.

Which are the main arguments in favor for a compensation policy?

  1. It creates internal equity
    Internal equity means similar pay for similar jobs. Why do we need internal equity? Let’s face the reality, salaries are not as confidential as companies would like. Therefore, employees come to know or intuit the salaries of their colleagues. In companies without an effective policy this situation becomes a real issue. An issue with immediate demotivation effect. In a company with a good compensation policy this is not an issue. Employees understand the reason why there are salary differences. There is a whole theory about creating and communicating reward policy and strategy.
  2. It creates market competitiveness
    A compensation and benefits policy will make a comparison between the salaries paid by the company and those paid for similar positions by competing organizations. In the absence of this comparison, the only thing you have is an opinion. It is important to say that paying at market median does not equal competitive pay.
  3. It creates clarity
    Clarity is very important when it comes to engagement and motivation. To create a comp & ben policy you have to go through a job evaluation process. A process that aims to determine the value of one position in relation to another. The result of the evaluation process creates clarity versus expectations, responsibilities, competencies, career trajectories.
  4. Stimulates motivation and performance
    A comp & ben policy will create a culture of fairness. This type of culture stimulates the high performing employees to continue to go the extra mile for the company. What I think it’s important to mention is that an identical merit increase to all employees is not recommended and fair.
  5. Eliminates subjectivity
    Job evaluation is an objective exercise that, as the name implies, refers to positions and not to the people who hold those positions. The discussion about people is a very important one and should be held as soon as the positions are evaluated. Why? Because to answer the question: “Do we have the right people in the right positions?” means defining what the “right positions” mean.
  6. Improve retention rate
    Realistically speaking, paying competitively means lowering the chances of an employee receiving a better job offer than the current package. Realistically speaking, there will always be someone who pays better, so an effective compensation policy will add the dimension of total reward.
  7. Attract the right profiles in the company
    The pay mix you offer is an important element in attracting and retaining different talent profiles. The reward policy should align these two elements.
  8. Provides predictability and efficiency of the salary budget
    A compensation and benefit policy will help you identify hidden costs and identify risks of attrition. In this way the risks can be diminished and / or assumed.

    In essence, a compensation and benefits policy supports the company to achieve its objectives by:

• motivating employees to act at their true potential

• retention of key talent in the organization

• attracting the necessary profiles for the company

• creating a healthy foundation for HR processes

Not to be misunderstood, a compensation and benefits policy is not the universal solution that solves all the problems a company has. It is a tool that together with other instruments can bring success to an organization. It is a powerful tool that, although it generates uncomfortable discussions, brings with it much greater benefits.

Learn rewards and benefits. Learn what it means to have a Data Analytics-based HR approach by joining the Humano Academy.