In today’s tight labor market, you must offer competitive wages and benefits. Whether you are recruiting new employees or focusing on employee retention, a solid compensation plan is key to finding and keeping top-quality employees.
When you get the mix right, you can:
- Attract and hire top performers
- Increase motivation and productivity
- Improve employee loyalty
- Enhance job satisfaction
- Reduce turnover
While employees today seek a good work-life balance and job security, they still rate salary and benefits as the top motivator. That means a regular review of your compensation package should be a top priority. But how do you do it? Let’s take a look.
Is it time to evaluate your company’s compensation package?
Wages rose more than 10% from May 2021 to May 2022.
If you haven’t examined your compensation package in several years, it’s past due. The Bureau of Economic Analysis tracks wages monthly and shows significant increases. Wages rose more than 10% from May 2021 to May 2022.
A lot has changed over the past few years. What might have been competitive two years ago may be woefully out of date compared to what your competitors are doing. Most companies do an annual review of their compensation plans. Typically, this occurs around the time you’re planning your budget for the next year, so you can plan for any necessary adjustments.
In a tight labor market with wage inflation, you may need to review your company’s compensation package more often. This could be the case if, for example, you have a high turnover rate and exit interviews reveal that compensation is a significant reason workers are leaving. If your job offers are getting turned down regularly, it may be another sign that it’s time to evaluate your compensation plans.
Key areas to review when evaluating your compensation plan
Most employees think about base salaries when evaluating compensation. In business, though, compensation goes far beyond the base salary. When reviewing your compensation plan, you need to assess total compensation and working arrangements.
Total compensation includes:
- Pay: Base wages, commissions, bonuses, financial incentives, profit sharing, stock options
- Benefits: Paid time off, sick days, holidays, health insurance, other insurance
- Retirement: 401(k), matching contributions, pensions
- Programs: Employee assistance, gym memberships, childcare assistance
Benefits and other programs beyond wages account for an average of 31.2% of total compensation, according to the Bureau of Labor Statistics. Many employers provide workers with an annual statement that shows their total compensation. This reminds them of the company’s contribution that goes beyond base pay.
While not directly tied to compensation, you may also want to examine your working arrangements. The adoption of remote work and flexible working arrangements has changed the landscape. Employees are placing a high priority on workplace flexibility and may be willing to trade higher pay for flexible work arrangements.
In one recent survey, nearly half of U.S. workers surveyed said they would take a 5% salary reduction if they can work remotely at least part time. It’s worth considering how this added “benefit” fits into your larger compensation plan.
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How to do an audit of your compensation plan
A comprehensive review of your compensation plan will look both internally and externally. Here are a few areas to review.
The first place to start is to conduct an internal review. A pay audit involves verifying employee compensation and identifying any pay disparities to ensure your pay is equitable for employees.
This process helps you see any areas where employees are not being paid fairly. There should be a logical reason for employee salary ranges. An audit helps assure there is no discrimination, especially among protected classes of employees.
It also helps you comply with employment laws. Before conducting a pay audit, it’s helpful to discuss it with your legal counsel to make sure you conduct the process correctly.
For recruiting and employee retention, you need to offer competitive compensation. This will require you to do a little research to benchmark your business against current conditions.
There are several resources you can use for competitive benchmarking, including:
- The Bureau of Labor Statistics
- Online job boards, such as Indeed and Glassdoor
- Industry-specific studies
- Third-party organizations
If you outsource your payroll to a company, you may want to check and see if it offers benchmarking services.
When benchmarking pay ranges, you also have to keep in mind your geographic location and your competitors. Some areas have higher costs of living, so comparing them to less-expensive areas may be unfair.
When it comes to competition, you also want to broaden your definition. In many cases, you aren’t just competing against others in your industry for high-quality employees. For example, someone in IT may have opportunities in a wide variety of businesses. Your compensation package must be competitive across industries.
Benchmarking needs to go beyond pay. By comparing benefits against others, you can see if there are any gaps or shortfalls.
Most analyses start with health insurance, which continues to be the most-desired benefit for most employees. There can be big differences between plans, so it’s important to take a deep dive and weigh factors besides cost.
Doing a benefits analysis doesn’t only ensure you have a competitive benefits package — it can also help you identify areas for improvement. For example, if you are providing benefits that few employees are using, you may be able to save money by rolling them back. You may also be able to make adjustments to your health plan for cost savings.
You can start by downloading our free Benefits Benchmarking Report to see how you stack up.
Doing a benefits analysis doesn’t only ensure you have a competitive benefits package — it can also help you identify areas for improvement.
Creating and maintaining a compensation plan that works for you
Establishing and sustaining a compensation plan that helps recruit and retain workers requires regular monitoring. It’s important to ensure you are competitive within your industry and with other companies in your area. Compensation benchmarking and pay audits are effective tools to help you see how you stack up and where you need to make changes.