Best Practice — Understanding the Strategy
The best compensation practice begins with a review and understanding of the organization’s strategic goals. Assessing the corporate philosophy and objectives is a crucial step. It makes a significant difference in the compensation plans that you develop because to be effective the plan must support the correct strategic focus. The next step is to consider all rewards when designing a compensation plan (salaries, incentives, benefits, work-life benefits, and opportunities for growth). Also, we want to recognize that compensation is not an island that lives on its own — it is part of a broader human resources function and corporate identity. Therefore, compensation is just one component, and it is developed best when in alliance with all other elements of human resources. Next, we will discuss the following step in ensuring a seamless compensation process: job descriptions and job evaluations.

Job Descriptions and Job Evaluations
After the strategy and reward components are understood, we can focus on the building blocks of the annual salary planning process. Job analysis and job evaluation (describing the job and assessing its value) are critical first steps. Job descriptions tell us what the job entails. They are used to ensure that we accurately match our company’s positions to those in salary market surveys. They are also used to provide internal equity and to be a tool for measuring an employee’s performance against the responsibilities set out in the job description. Job evaluations should reflect the strategic criteria which the company most values. They can be point-based, market-based, or some combination of the two. Having completed the job descriptions, we can proceed to the following step in the process: the analysis of compensation surveys and development of salary structures.

Compensation Surveys, Salary Structures, and Regression Analysis
Competitive market compensation surveys hold a wealth of information when used correctly; they include not only the salary information for similar jobs in other companies, but can also contain incentive, benefit, and practice information. One of the tools for analyzing the massive amount of data gathered in salary surveys is a type of statistical analysis called regression analysis. Regression analysis is just a mechanism for finding out the relationship between two or more variables (usually grade and salary). Another example, if you want to find a connection between three variables such as education level, amount of sales, and job experience for a group of employees within the same job family, the compensation analyst would use regression analysis. In a case of three or more variables, the compensation analyst would use multiple regression analysis.

When applied to the development of salary structures, regression analysis defines the level of market pay relative to a pay grade. The development of a salary structure from salary surveys helps to provide a tool for management to pay within a range of their competitors’ pay. By comparing your company’s current salary structure to the one that would be competitive, given your analysis of the external market, you can determine the amount of overall movement necessary to bring your current salary structures up to date. Your salary structures give managers a guide for the amount of money to pay for a job to remain competitive with the market. By comparing individual’s pay to the median (midpoint) of the salary structure range, one can compute a comparatio. The comparatio gives you an idea of how close to the middle of the range the employee’s salary is (95% is a little less than the midpoint, 105% is a little above the midpoint). With the survey data analyzed and the salary structures developed, we can advance to the creation of an annual salary budget.

Annual Salary Budget and Performance Appraisal
Derive the annual salary budget from a combination of the market evaluation and the company’s affordability. Salary budget surveys can be a starting point for your budget dollars. Develop a pool of funds by multiplying total employee base pay dollars by the assessment of percentage. Following the budget assessment, an accurate evaluation of the comparison of employee’s pay to the market (comparatio or range penetration) is performed. There are two costs to consider in an annual budget process for base pay: merit increase and adjustments. A merit increase is most often tied to performance and the employee’s salary comparison to the market (structure midpoint). This can be accomplished with the use of several devices: comparatio, range penetration, percentiles or quartiles. The relationship of employee performance and pay is represented within a merit matrix that ties the two together. Adjustments are usually considered when a group of employees’ pay is considerably different from the market pay or the pay of other similar jobs in the company.

The performance appraisal is another important consideration when determining the amount of salary or salary increase one should award. Often, compensation professionals design a merit matrix. This tool can be a guide for managers’ decision making. Essentially, the lower comparatio and the higher performance rating yields the highest salary increase, because these high performers are being paid low relative to the external market. One must also consider, though, internal equity (how an employee’s pay compares to others in the same level job within the company). The management tools and employee communications become a crucial component of the salary planning cycle. Well-designed tools and a customized communication plan help employees and managers understand the rationale behind the salary increase budget and can boost employee buy-in when framed with the company’s strategic goals.

Human Resource Information System (HRIS)
The next step in the process is that of updating the company’s human resource system to include the new salary structures and budgeted salary increases. Timely reports or reporting systems help managers better manage their group/department. It also is the crucial component of the monitoring process that will allow the company to stay abreast on their position to the market over time. It is advantageous to have HRMS involved, up front, in the salary planning process so that they can make any necessary adjustments to the system and integrate the salary planning process with other processes and systems they are executing at the end of the year.

Ongoing Oversight and Monitoring of the Compensation Plan
A system of ongoing monitoring of the compensation plan is one of the most critical steps in the compensation process, but it is the most underutilized. Monitoring the internal company salary metrics (salary levels, pay decisions, position to the market, performance appraisals) to the budget and examining the external market should be done year around. Keeping abreast of salary movement and economics in the marketplace helps to prepare for the following year, but more importantly, allows compensation to play a more strategic role within the company. Compensation can be on the leading edge of knowing when a critical talent is coming to the forefront. With real-time survey data provided throughout the year, the compensation analyst can help to ensure that critical expertise is not lost to a competitor that is paying more competitively.