The year may already be well underway, but there’s no time like the present to revisit your compensation practices to determine which ones make sense to keep and which ones to leave behind.
Based on my five years of experience working with compensation and HR leaders, here are the pay practices I believe comp teams should consider retiring this year.
Archaic salary structures
In a world where comp leaders are driving toward buy-in, transparency and engagement around compensation — old pay structures or processes that weren’t designed for your organization as it exists today — have got to go.
Any type of pay range should serve to set the upper and lower limits of eligible compensation for a particular role. A range typically includes a minimum, midpoint and maximum based on the market data for that job with alignment to the internal value of a role as well.
This year you should focus on the type of salary range structure that aligns with your business. Here are three options:
- Job-based pay ranges keep it simple and allow room for growth and change. This salary structure involves aligning pay ranges with the market data for any given job (within the relevant market location) and creating a pay range for each unique position. This type of pay range structure works well for fast-moving and continuously evolving organizations that plan to keep track of pay ranges throughout the year. Job-based ranges are the zippy sports car of pay range structures, fast-moving and requiring regular maintenance.
- Pay grades (or grade-based ranges) group similarly valued (internally and externally) jobs together within a wider pay range that encompasses multiple roles. In years past, many organizations relied on this type of pay structure to minimize change and simplify management of pay ranges. This decision was often driven by their inability to manage evolving pay ranges through strong technology. This type of pay range structure is most valuable to organizations with a lot of jobs and minimal intent to change and update job ranges each year. You can think of grade-based ranges as the SUV of comp ranges — big enough to fit your whole family and ready to run for a while.
- Pay bands are extremely broad groupings that include multiple pay grades and/or ranges within each pay band. This type of pay range structure, frankly, is old hat. Wide pay bands are not well-suited for specificity or motivating communication to employees about their pay and how they may grow within their pay range. It’s a little bit like an old clunky ’70s sedan — wide, large enough to fit a lot of people, and nearly impossible to take on sharp turn.
“Compa ratio”
Compa ratio is still a very commonly used terms among comp and finance teams to articulate the average ratio of employees to the midpoint of their pay range. But the term tends to fall flat with employees, managers and business stakeholders who don’t live and breath comp data.
Think about using simpler terminology like range progression or range penetration when showing managers and employees where their pay falls within a pay range. These terms immediately display the context of their definition — the progression or penetration of pay within a range.
How does using the compa ratio work with merit pay? Not as well as you might think. See “Your Merit Pay Program Has a Fatal Flaw.”
Performance without pay
If you are still doing standard performance reviews — but aren’t using that information to tie pay to performance, it’s time to rethink the review process.
Formal or informal performance reviews, forms and conversations are only as valuable as the performance they inspire. If your current performance review process is driving performance — keep at it! If you’re not aligning performance expectations to performance results through pay — it’s time to ditch the process or pony up for the pay out!
Pay without performance
It’s time to toss out the “peanut butter” increase — a flat increase percentage across the organization regardless of market, performance or results — and focus on tying performance to pay. Pay without performance describes pay decisions made based on outdated factors like cost of living — or pay decisions made based on an executive’s gut feel.
Make 2019 the year that you tie performance to pay — either by communicating and paying out increases or bonuses based on company performance (profit share, spot bonus, etc.), or by tying individuals base pay increases or variable pay plans to individual or team performance metrics.
This doesn’t have to be complex, start simple with a key business goal and tie pay to the results of that goal.
Proration
Proration refers to the practice of allocating a portion of an increase to an employee based on their hire date or time in role. It is typically utilized in hose “peanut butter” increases — to account for prorating a given increase percentage toward employees who have been “in seat” for only a portion of the calendar year. The mindset behind this approach made sense in the past when everyone got the same 2 or 3 percent “blanket” increase every year, and an organization wanted to account for the fact that not all employees had been at their firm for the totality of the year.
Because it’s so much more common now for increases to be based on the market and on performance, time in role matters less and less and someone shouldn’t be “penalized” for joining your firm in the middle of the calendar year. If you are going to give them an increase, give them the increase.