Where to Begin with Compensation: Insights from a Compensation Expert

When it comes to paying your employees, starting with the right strategy is critical, and we’ve seen firsthand what works—and what doesn’t.

ERC compensation expert Nicole Doria, CCP shares practical insights to guide you through the essential steps of developing a compensation strategy. Whether you’re a CEO or an HR leader, these three steps will help you build a strong foundation that supports your organization’s long-term success.

1. Develop a Compensation Philosophy and Strategy

The first step in developing a strong compensation program is creating a clear compensation philosophy and strategy.

A compensation philosophy is essentially your organization’s guiding principles on how you value and reward your employees. Beyond that, though, a compensation philosophy can help you communicate your organization’s stance on pay to employees.

A compensation strategy outlines the specific actions you’ll take to implement that philosophy.

Both are important because they provide consistency and transparency so that your pay practices align with your company’s goals and values.

Here’s what to consider when developing a compensation philosophy and strategy:

1. Define Organizational Priorities: Identify key values like industry competitiveness, internal equity, innovation, employee retention, or even cost management. Ask yourself how these should influence compensation.
2. Establish Guiding Principles: Decide how you want to reward performance and what balance you want between fixed salaries and variable incentives. You might consider factors like merit-based pay, profit-sharing, and monetary (or non-monetary) rewards.
3. Outline Strategic Actions: Create specific steps like conducting market research, benchmarking against industry standards, and determining pay ranges (read on for more information about how to approach these steps). And don’t forget about the future—think about how you’ll conduct regular reviews and update your strategy so it remains aligned with your goals and external market conditions. 

2. Conduct a Market Data Study

The second step in developing a compensation program is conducting a market data study. This involves gathering reliable and valid market data to benchmark your organization’s pay against the market and other competitors.

Using valid and credible sources is important because it ensures that your data is accurate and reflective of the current market conditions. Why is accurate data important? Without it, you could be overpaying or underpaying employees, both of which can lead to negative consequences for your organization.

Here’s how to get started:

1. Choose Reliable Sources: Opt for valid, recent, and accurate compensation surveys or databases specific to your industry. We caution against using Google to find compensation data and instead use sources like ERC’s salary and wage survey data that’s collected directly from employers. Alternately, consider industry-specific data or databases if available.
2. Match Job Roles: Align your internal job descriptions with market benchmarks to ensure accurate comparisons. And don’t forget to periodically review and update job descriptions to reflect changing roles within your organization. (Pro Tip: Looking for help with job descriptions? ERC members get access to a robust job description database)
3. Consider Company Demographics: Tailor your data analysis to reflect your company’s size, industry, and geographic location. It’s also important to benchmark your jobs regionally and at the state level. Comparing jobs in Ohio against jobs in California, for example, won’t be helpful given the cost of living differs greatly between states.

3. Build an Internal Pay Structure

The third step in developing a comprehensive compensation plan is building an internal pay structure. A pay structure is a framework that organizes job roles into job grades, each with defined salary ranges.

This structure provides consistency and transparency so that your pay structure aligns with both your compensation philosophy and market data.

To get started:

1. Create Job Grades: Group similar roles into grades based on responsibilities and required skills. For example, if you have multiple engineering roles that vary based on experience, you may have an Engineer 1, an Engineer 2, and an Engineer 3, and each job grade progresses in terms of experience, skill, and responsibilities.
2. Define Salary Ranges: Establish salary ranges for each grade based on market benchmarks and internal equity. For each range, you might set a minimum starting point, a midpoint reflecting the market average, and a maximum for highly experienced employees. And of course, it’s critical to review these ranges regularly to adapt to market changes over time.
3. Align with Strategy: Ensure that your pay structure reflects the principles and goals outlined in your compensation philosophy. For example, you might consider how valuable each role is to your organization’s objectives.

An effective compensation strategy starts with a clear philosophy, thorough market research, and building a structured pay system. This foundation will help your organization’s pay practices stay competitive and aligned with your values.

Need guidance navigating the compensation process? Consider working with an ERC compensation consultant. Or if you’re looking for reliable compensation data, ERC’s compensation surveys offer the data you need to benchmark your wages and salaries effectively.