Compensation for employees’ efforts has always been a hot topic. People think that they are underpaid, while leaders often are on the opposite side of the spectrum. No matter how much companies pay, seeing what the progress in the results is, people tend to want more. And why not? After all, their contribution to the company’s greater good is there. No matter the impact, the gift is a reality. And people want to receive more, like the company that makes more than in the previous periods. In annual salary negotiations, companies’ leadership bodies are often stretched to distribute budgets for increases fairly. At the same time, the employees expect higher payments for their next year within the company. The more significant the gap between the expectations and the actual pay increase, the higher the stress level created.
While miscommunication with pay gaps is often created by needing more information or being informed correctly, there are some tactics leaders can introduce to ensure that people will understand how the payment process and salary reviews are happening within the company. Of course, that action will not make the stress from the process disappear, but at least it can make the whole process look more transparent and logical.
People will still disagree with the process because, in the basics of it, there is always the understanding that they are not paid fairly for their efforts, but getting all the steps and the logic of the process of payment to everyone’s attention and clearly explaining it is a prerequisite for further improvement of the process, stepping based on productive and positive discussion.
With no more prelude words, move down the article to find the five principles.
Create compensation aligned with organizational mission and strategy.
What makes companies unique places to work is not the industry or the region but the main reason this company exists. Some companies declare that they are there to make money and nothing else matters; others have a social mission, and money is set as a second-level factor in their mission. There is also a third group of companies whose basic declaration is that they exist to create wealth for their owners but do it while investing much in sustainability, the environment, etc. Looking at the company mission can clearly and in simplified ways show employees the most desired driver and how the organization sees success. The mission also defines the strategy. For example, aggressive companies focused on money-making should invest more in employees’ well-being. You go to this company to make money but expect to be treated poorly. Nothing shows people they are valued as people, but they are mostly seen as numbers in the spreadsheet that create other numbers. A similar approach is also seen with different types of companies. Strategy is predefined as a set of critical actions to fulfill the company’s mission. With that in mind, leaders should show a clear connection between mission and strategy to achieve that mission and describe the next element in the process.
Align compensation strategy with company culture.
No matter what structure or content of the compensation a company decides to implement, there is no doubt that specifics come from the company’s understanding, beliefs, and attitudes. Where there are more than two people in an organization, there are specifics in relationships, dependencies, and connections. Going for the best-in-class strategy for compensating employees for their efforts is directly connected to the styles of managing others, understanding how people are positioned in the organization, etc. Some cultures see people as numbers and assets; others accept them as people first and then as employees. How people are seen and what defines their value for the organization is a prerequisite of defining culture. How organizations see people reflect on leadership styles, the setup of organizational processes and structures, and compensation principles. For example, if the company sees employees as tools for delivering results, they invest little time, effort, and resources. These types of organizations are process-oriented, and people get as little as possible to exceed the minimum required to deliver results. Compensation systems are hierarchical and bureaucratic, and people must be more motivated to contribute. On the opposite side are companies that invest in people and believe that this investment can be easily turned into valuable results. These companies often pay salaries above the mid-range, create different financially beneficial perks for employees, and invest in a culture of support.
Chose compensation structure appropriate for the workforce
No matter the diversity of companies and industries, many employers still copy and paste working compensation strategies from another company or, even worse, from another drive. It looks easier initially, but then this move turns into a mess. Industries are different, and what principles may work in one sector must be corrected for another. There was an excellent practices library more than ten years ago, offering examples of companies incapable of creating their compensation strategy and how superb compensation strategy looks in leading companies. The problem was that the library pointed more to traditionally recognizable brands and companies and presented their systems as the most effective ones on the market. And so many companies just copied parts of these systems, created for many years, to later understand that what they have copied doesn’t work for them. One of the most essential principles is knowing your people and your industry’s specifics. After collecting information about those two parameters, the next step looks more obvious – structure compensation, aligned with all specifics like work time, work hours, acceptable breaks and work schedules, work up, people expectations, and industry allowances for each role.
Compensation must be externally competitive.
So many large companies use the excuse – we are mature enough to afford to pay lower salaries because people join our structures not for the money but for the opportunities our name creates. That is true and wrong at the same time. The truth is that offering more than the basic compensation is always valued by the employees, but still, in a world that increases the cost of living every year, paying much lower than the external market can leave even the brightest names as companies with no in-house talent that can support their future growth. Designing the compensation model is one thing, but when the company finishes the framework of that design, then comes the data. And the number one rule is to be competitive to the market specifics. For example, when logistics grows exponentially, a strange phenomenon shows that warehouse workers can receive similar salaries to those qualified for analytical and complex work. That is a specific solid in the market, and overlooking it may cause a company to suffer high losses. Competitiveness in the market for the company explained to get data from and for the market and include it in your compensation model, just next to the salaries you pay to your employees. With that step, you have now built a comparison dashboard showing where you stand against the market and where you must focus on creating a more competitive compensation package to allow your brightest talents to stay and win for you instead of leaving and going to win for your competitors.
Compensation must be Internally equitable.
Equity – is so misunderstood as a term. People often talk about equity, but they usually mean something different – parity. For the company to be fair with people and benefit from their engagement and internal motivation, the leadership team must create a compensation strategy to recognize and reward individual contributions correctly. That is why so many performance systems and internal and external tools for evaluation are designed and distributed. Equitable does not mean equal, but it is more important to be not afraid to document performance and impact and deliver honest feedback to everyone – no matter the level or the department. Equitable, in other words, means to create such a compensation system that allows the company to focus and invest more in those who deliver the highest results and serve as an example, and create understanding in others who do not meet internally developed standards in-house where they stand in the circle of life in the company. Not being equitable, in other words, means that the company directly underestimates their brightest talents and slowly turns them into average to mediocre contributors. Understanding equity in terms of norms and morals is a high-level step for improvement that focuses on higher results and direct action plans for securing the company’s future.
IN CONCLUSION:
Although creating a compensation system looks more like an administrative job, It is more of a shape of a mindset. Working consistently with the mentality of winners and educating people in the organization to do the same is the shift that a great compensation system seeks. Doing not what is acceptable but what is right can bring every company into the future as a leader and winner in their field. And compensation systems are the high ground leadership teams must step on to ensure the future.
The Human place - a path from you to yourself 