Fair Compensation: What, Why, and How?
What counts as fair compensation for employees? Here’s what employees and HR pros need to know about creating fair, competitive compensation plans.
Note: This story was last updated January 31, 2023
Nowadays, providing an average employee compensation package doesn’t cut it. Today’s workforce is increasingly seeking signs of what they consider fair compensation as well. For companies to remain competitive, they’ll need to dig deep into their compensation strategy to see if they’re hitting the mark.
Zippia career research analysis estimates 54% of employees nationwide would leave their job for a raise elsewhere.¹ If that’s the case, theoretically you could lose half your workforce if they were enticed by the right compensation offer.
Still, many employers wonder what constitutes fair and equitable compensation. What steps can they take to improve their packages to ensure their employees are fairly compensated?
Fortunately, it isn’t as complicated as it may sound. Here we’ll define fair compensation and outline the benefits of investing in pay equity strategies which will apply regardless of where the labor market currently stands.
What is fair compensation?
If compensation is the total amount of payment an employee receives from their company, fair compensation is essentially providing each employee with the “right” salary and benefits in relation to the value they bring to the organization.
The problem with the concept of “fair compensation” is that it is rarely clear-cut. It may also be misconstrued as a push for “equal pay.”
Generally, when developing a good compensation plan, it should be based on a few components. One would be your company’s compensation philosophy. How does getting employee compensation right align with your company vision, values, and desired culture? Then, for your comprehensive compensation plan, consider the following:
Industry
Your industry can significantly affect wages, from employee pay ranges to how you pay them. Do you pay an hourly rate, or an annual salary? Much of this comes down to how your industry operates.
Years of experience and depth of knowledge
An employee’s levels of knowledge and experience also affect pay grade. Individuals with many years’ experience and/or additional education that raises their level of expertise tend to be paid higher than those with less. Most employees with advanced knowledge expect higher pay commensurable with their level of expertise.
Job performance
As employees progress within an organization to become top performers, they are more likely to be eligible for pay increases. If you don’t increase an individual’s base salary over time, your experienced people may be less likely to stay. If tempted, they may jump over to competitors offering better wages and compensation packages for the same type of work.
Employee location
Wages and salaries are heavily influenced by geography. For example, it generally costs less to live in Tennessee than in California. As a result, a thoughtful pay structure tends to align the pay level with local market value.
Supply and demand
Positions that are difficult to fill due to high demand and relatively few candidates also end up being dependent upon higher pay to attract and retain candidates. Current market data often directly drives which jobs will tend to offer higher base pay as economic conditions command.
When developing a fair compensation strategy, you may also want to consider the difference between fair wages and minimum and living wages. A living wage is calculated based on the amount an employee needs to support themselves without needing a second job. Living wages vary based on employee location.
Why is fair compensation important?
Providing your team with fair compensation is important because it’ll help you remain competitive in your industry or locale. Benefits you’ll enjoy include attracting top talent and improving employee morale, engagement, productivity, and retention rates. Ultimately, these benefits will likely also influence profitability.
How do benefits factor into fair compensation?
No matter what salary ranges you determine, consider additional forms of payment, as in benefits and perks. Not everything is about the base salary or bonuses. Oftentimes, employees remain loyal to their employers partly because of extras provided in their compensation packages. The top benefits employees often seek include:
- Flexible work hours and remote work options.
- Health, life, disability, and workers’ comp insurance coverage.
- Mental health support.
- Retirement savings with matching contributions.
- Profit sharing and investment options.
- Tuition reimbursement and professional development opportunities.
- Paid time off for sick days and vacations.
All of the above are additional forms of compensation that can improve the quality of your total compensation plan. You may also want to consider merit pay. A.K.A. incentive pay, this is often presented as a bonus, base pay increase, or some form of performance-based variable compensation. It’s typically awarded to top talent and others who put forth great effort and meet or exceed goals and expectations in a given period of time.
When hiring new employees, it’s important you convey the total value of their compensation package to them. Many applicants, and even existing staff, may not realize the total value of their combined salary and benefits. Even if they don’t see large pay increases, providing them with valuable benefits and perks can sometimes exceed nominal raises.
How do you ensure fair compensation?
To ensure you’re providing your employees with fair compensation, you can conduct a comprehensive compensation analysis. This involves in-depth market research and compensation rate comparisons. A good initial resource is the U.S. Bureau of Labor Statistics. This government agency presents wage and other relevant data broken down by position and geographical location, providing a good jumping point.
You can also routinely conduct pay audits to ensure there are no discrepancies. An audit should investigate the effectiveness and competitiveness of salaries, bonuses, incentives, and equity programs for all employees. Ask yourself the following:
- How much does someone earn upon entering the company, and how does their pay change over time?
- Does every position have its own pay grade?
- Do employees have room to negotiate their pay? If so, how does negotiation affect their salary?
- Do all employees have the same opportunities for raises and promotions? How does the company determine who deserves these and other rewards, and are the criteria consistent?
- Are there arbitrary differences in pay between genders, ethnic groups, etc.?
- How do employees feel about their current compensation packages? Are they on par with current market rates?
By examining these questions and evaluating your current compensation strategy, you can proactively measure your offerings against your competitors’.
Focusing on fair compensation is a win-win for all involved
Cultivating fair compensation practices is bound to benefit both you and your employees. Employees will be paid fairly for the value they provide. And you will be able to attract and retain the talent you need for competitive advantage.
To learn more about employee compensation and other important HR and business management topics, visit Workest by Zenefits daily.
