CHR
Founder Cite.co
Ed Llarena, Jr.
Owner/ Managing Partner
Afolabi Ajayi
Hr/mktg Consultant

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Determine your organization's salary philosophy. Do you believe in raising the level of base salaries in your organization or do you appreciate the flexibility of variable pay?

A growing, entrepreneurial company, with variable sales and income, may be better off controlling the levels of base salaries. When times are good, the company can tie bonus dollars to goals achieved.

In lean times, when money is limited, the company is not obligated to high base salaries. A longer-term company, with fairly stable sales and earnings, may put more money in base salary.

Find Comparison Factors for Salary

While I believe every organization can benefit from industry comparison studies, if conducted by reputable organizations, the bigger question is whether you are competitive within your local market for most of your positions. Research the salary range for similar positions and job descriptions. The job description is particularly important for comparisons but usually harder to find for comparison.

Determine whether you are competitive with similar positions with organizations of similar size, sales, and markets. If you can find companies in the same industry, especially in your area or region, that is another good comparison source.

What Goals Must Salary Help You Achieve?

Pay must relate to the accomplishment of goals, the company mission and vision. Any system that offers an employee the "average" increase for their industry or length of service (usually 1-4 percent) is counter-productive to goal accomplishment. Even an above-average increase that differentiates one staff person from another can demotivate. One manager at a GM plant offered his star staff person a seven percent increase because she had accomplished all of her goals and "walked on water." Motivating? Should have been, however it was not when the staff person knew others in the organization were receiving ten percent increases and more.

Additionally, your pay system must help you create the work culture you desire. Paying an individual for his performance accomplishments alone, will not help you develop the team environment you want. Thus, you must carefully define the work culture you want to create, and aim your best salary increases at those contributing to the success of that culture. If you want your organization to change, define the change, and pay employees commensurate with their support of and contribution to the change.

Finally, your salary strategy must align with your human resources goals and strategies. If the HR function is charged with developing a highly skilled, outstanding workforce, you must pay above industry or regional averages to attract the quality employees you seek. Paying less than comparable firms will bring you mediocre employees and fail to fulfill the desire to create an outstanding workforce. If, on the other hand, the HR strategy is to get cheap labor in the door quickly with little regard for turnover, you can pay people less salary.

Assess the Competition and Labor Markets

We’re currently experiencing a period of high unemployment. Many skilled people are available because of job loss, the economic downturn, the demise of many dot com companies, and other reasons. Consequently, the economic reality is that you may be able to hire good people for less money than in the past.

This may be short-term thinking, however. Don’t get too far out of line with what you would have paid that employee during better times. You risk losing her when the economy improves. She may never feel valued by your organization if her pay is out-of-line with her experience and contribution. She may never really stop her job search, using your company as a resting place until the right offer arrives.

You will also want to consider percentages of increase in salary in similar jobs in your local area.

Ask yourself if this is an employee you really want to keep? If so, pay the employee a salary that makes you the employer of choice.

Create Salary Ranges Within Your Organization

People always talk about salary and pay issues. No matter how many times you ask them not to discuss their salary and other personnel issues at work, they do. Thus, grouping similar positions with similar responsibility and authority into pay ranges, usually makes sense. Nothing impacts morale as much as individuals who feel they are underpaid in comparison with others based on their contribution and that of other similar jobs.

Recognize Your Benefit Package Role in Salary Satisfaction

An organization that offers better than average benefits may pay less salary and still have motivated, contributing employees. If your health plan fees go up and you continue to pay the cost, this is the same as pay in your employees’ pockets.

The range of benefits you offer, and their cost to the employer, is a critical component of any salary approach. The biggest mistake organizations make is failure to communicate the value of the benefits offered.

Determine Bonus Philosophy and Potential

You may pay a bonus that is determined individually based on the value of the goals accomplished and the person to your organization. You may give all employees the same bonus, based on group goal attainment, across the board. You may use profit sharing in which a portion of company profits is paid out equally to every person who was employed during the time period.

Ways to address bonus, as part of your overall pay system, are limited only by your imagination. I recommend bonus structures that are fair, consistent, understandable, communicated up front, and tied to measurable, achievable goals. The better the shared picture of what constitutes eligibility for a bonus, by the organization and the employee, the more likely the bonus will result in employee motivation and success.

Communicate Your Salary Philosophy and Approach

In many organizations, who gets what and why is a cause for consternation, gossip, demotivation, and unhappiness. The more transparent you make your pay and salary philosophy and determinations; the more likely you are to achieve positive employee morale and motivation. Don’t keep your salary philosophy a secret. Yes, individual compensation is confidential, but your methods for determining pay must be clear and understandable.

Conclusion

If you take these tips to heart and apply them within your organization, you increase the likelihood that you’ll have happy, motivated employees. The alternative is to use your salary system to create disgruntled, grumbling, unhappy people. Which group do you think will do a better job of serving your customers? Increasing your profitability? Making you the employer of choice? Increasing your positive visibility in your community? Is there any question in your mind?
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Hi!
Determining (or designing) a company's salary (compensation) philosophy can be better achieved when people are familiar with the basic Theories of Compensation, such as the classical and the contemporary labor market theories. Also, one must remember the basic characteristics of what makes a compensation philosophy ideal.
The following are the characteristics of an ideal compen philosophy:
- internal equity
- external competitiveness
- affordability
- sustainability
- responsibly safeguards the resources of the organization
- legally defensible
- understandable/ sellable
- efficient to administer
- flexible
- appropriate for the organization
Best wishes!
Ed Llarena,Jr.
Managing Partner
Emilla Consulting

Gautam,

Determining the compensation for certain positions, expecially managerial positions, is not really difficult if you have the necessary tools to use.

When we do a compensation review for managerial positions, we use the Job Rating tool of the JE program. The JR uses compensable and sub-compensable factors to assess and rate each position. Those positions that earn or gather the same point scores are classified into the same Job Class and Grades. They are also given the same compensation or pay range.

This method/ procedure applies to all other positions in an organization, esp. in the creation of the pay structure hierarchy.

The critical role of a compensation philosophy lies in its ability to shape the size and spread of your pay ranges. When an organization decrees that it wants to pay its employees within the pay levels of the top companies in their country, then the salary structure of that company will have to adjust to the market rates of the target/ benchmark companies.

Best wishes.

Ed Llarena, Jr.

Managing Partner

Emilla Consulting


Dear Cite Hr Admin,
If I have tio think like Ed Lieran, creating a Compensation Philosophy would certainly entail virtually all listed above by Ed.
However it should be noted that appraisal/performance evaluation would certainly be a major yardstick for hold hands on the job.
In addition is the fact that there are industry based packages that can not be compromised hence these are benchmarks upon which similar companies in the same sector should build upon.
Closely linked to the above is the fact that every HR or Company should as a matter of policy have a period of salary review and should not wait for employees to agitate for an upward review of such especsially in environments prone to inflation.
Best Regards
Afolavi,

Hi! You are correct to a certain extent.

The result of Performance Appraisal will definitely shape the salaries of the incumbents.

But this situation should only happen after you have already established your salary structure so you will have a guide on the allowable size or spread of the increments you have to make on a year to year basis. Without a salary structure to guide you, chances are you will be encountering SALARY DISTORTION in the immediate future.

Unique compensation and benefit packages of companies (or even industries) will only have meaning or relevance when they are still within current practices as shown by market data or compensation surveys.

It would be useless to cling to traditional compensation schemes when these are not serving the goals of the organization, especially with regards to employee retention and employee satisfaction. We are not talking here about unique compenation packages that are above the best industry practices.

Annual reviews are part of the normal compensation management system. A good salary structure, however, should serve the company for a minimum of THREE (3) years. When my company designs a salary structure, we guarantee its effectiveness for at least FIVE (5) years for cost saving reasons.

This is due to the fact that Job Evaluation Programs and Compensation Reviews are expensive. The years between the review periods should be the "ballgame" of the company's HR Manager. What needs to be done is only to make sure that the annual adjustments are properly managed within the "STEPS" or "spreads" between the different JOB GRADES of the salary structure.

Best wishes.

Ed Llarena, Jr.

Managing Partner

Emilla Consulting


Dear Ed,
Thanks a million for the exposition put forward as it relates to Compensation.
In as much as we want to think globally our local business environment
most times determines the ratio of percentages and frequency of salary structure we put in place.
Just sharing with you- in my own business environment for instance we had fuel/gas price hike about three times in the year-so it is better imagined our this would have a rippling effect on the assumed well prepared package-which would become irrelevant as soon as possible.
Hence some Companies around here in Nigeria adjust their packages based on rate of inflation in the economy.
Lets keep in touch.
Afolabi Ajayi
Afolavi,

Hi!

Inflation rate is a normal factor being used by many companies in the year to year adjustment of salaries. Some companies would make it as the minimum annual adjustment per year in order to restore their employees' salary purchasing value.

Others would include it with some other factors, like performance appraisal result.

These factors (inflation and performance) are taken into consideration by consultants like me when we design salary structures. The GAPS or SPREADS per STEP within a JOB GRADE have anicipated the maximum possible inflation rate and performance reward rate that the company is willing to give per year.

Good consultants know this by heart because we study our client's merit and rewards system when we do JE. Our critical VALUE ADDED is the reasonable ceiling per STEP and PER JOB GRADE and their impact on the entire salary structure.

This is where skill, talent, and creativity of the consultant you hire comes in and make the difference.

I am sure that you also know the international average of MERIT INCREASE per year, and the maximum allowable TOTAL personnel cost in a company to be considered cost efficient in its operation. Beyond that rate, the company is considered to be inefficient, not cost effective, and not implementing QUALITY MANAGEMENT SYSTEMS (QMS).

Best wishes.

Ed Llarena, Jr.

Managing Partner

Emilla Consulting


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