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Strategic Compensation Design

Updated: Jan 23


Understanding Compensation:

Compensation, in its most basic form, is the rate at which we renumerate employees in exchange for their services. It has various components, but the general consensus in the industry is that there are two categories with various components depending upon the organization’s individual needs. The categories are direct (financial only) and indirect (financial and non-monetary).


Direct compensation is usually comprised of salary, hourly rates, bonuses (sometimes called variable or at-risk pay), and commissions. Indirect is considered financial because it costs the organisation money. However, it does not result in cash in hand for the employee.


Sometimes this is casually translated to job perks. This is typically in the form of vacation time, flexible scheduling, benefits packages, phones, laptops, car allowances, etc. Many newer employers with cash flow challenges may offer equity pay such as stock options and ownership of the company.



The categories combined constitute what is known as "Total Compensation". Total compensation can (and will) often include different rewards and benefits at different job levels. This is in recognition of the years of service and dedication to the organization, beneficial for retention purposes. There is a great book with Canadian perspectives on this called "Strategic Compensation in Canada". As employers, we have an obligation to our employees to clearly outline all components of the compensation programme to articulate what it takes to excel.


Benefit 1

Compensation programmes provide employees with a clear understanding of their entire remuneration package and allow them to understand the present and potential future rewards provided in exchange for their service and skills.


Strategic Compensation Planning:

Compensation planning is an essential component of an overarching human resources strategic plan. A good compensation plan often begins with your philosophy. In other words, how you wish to be seen as an employer in regards to the exchange of skills and abilities for both direct and indirect forms of compensation. <iframe style="width:120px;height:240px;" marginwidth="0" marginheight="0" scrolling="no" frameborder="0" src="//ws-na.amazon-adsystem.com/widgets/cm?ref=qf_sp_asin_til&t=corvaliekeats-20&m=amazon&o=15&p=8&l=as1&IS1=1&asins=0176657169&linkId=3cfba75e31bf1448d2f47e4c0d5a9827&bc1=FFFFFF&amp;lt1=_top&fc1=333333&lc1=0066C0&bg1=FFFFFF&f=ifr">

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This process normally happens at a senior level and can be crucial to business operations. For example, it may be a bad idea for a non-profit charity to be known as the highest-paying employer in the industry. Donors may not find that appealing. The employer must explore their approach to this step by asking questions such as:

  • What, if any, differences should exist in pay structures for executives, professional employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based versus noncontingent pay)?

  • Should the company set salaries at, above, or below the market

  • To what extent should employee benefits replace or supplement cash compensation?


Once this process is complete, a clearly articulated philosophy will outline your approach to compensating existing employees and potential candidates for roles. A well thought out strategy should help with both recruitment and retention of staff. It becomes apparent that you have given consideration to the motives of your staff and are keeping them whole.


Benefit 2

Compensation philosophies hone in on what matters to employees with regard to recognition for their efforts. Communicating your compensation philosophy will support the recruitment and retention of your staff and be consistent with your overall operational culture, goals and objectives.


Job Evaluation:

No two jobs are always completely alike. Consequently, the application of fairness and equity in determining pay structures is an important aspect of compensation planning. Legal obligations outline employer obligations.


Job evaluation is a process by which employers determine the net worth of a job compared to others within the company. It is a systematic and consistent way of determining the net worth of a role. The outcome is a defensible and rational evaluation to determine your pay structure.


The process involves evaluating the job and not the employee. Jobs normally fall within a hierarchy in organizations. The outcome of a company evaluation clarifies this hierarchy.

This differs from a job analysis, which outlines the duties and responsibilities of the roles. These in turn determine the qualifications and competencies required to perform the work. The compilation of this information creates the job description.

Not getting this right leads to future complications. Employees in mismatched roles may not perform up to expectations. This can become expensive for employers as the cost of terminations can be quite substantial.


Benefit 3

Having clarity in job descriptions ensures the employer performed due process, as job descriptions clearly outline expectations, skills, and abilities needed to perform well. For recruitment purposes, job descriptions also form the basis of job postings.


Compensable Factors:

As stated, the critical work of job evaluation provides employers with insight into the needed education, experience, skills, and abilities to succeed. The following are the generally accepted factors that go into a job evaluation from BLR.COM [1]:


  1. Experience. How long should the incumbent have worked in this job or in closely related jobs to be fully qualified? Is it important that the experience be within or outside the organization?

  2. Education. What does the job require in terms of formal schooling, training, certification, or knowledge of a specialized field?

  3. Responsibility. Is the employee responsible for the safety of other employees or for the loss or damage to tools, materials, or equipment? How significant to the employer is the work the position is responsible for? How big is the budget the incumbent manages?

  4. Complexity of duties. Does the job require the incumbent to show judgment and initiative or to make independent decisions?

  5. Supervision received. How closely does the incumbent’s immediate supervisor or manager check his or her work? Does the supervisor or manager outline specific methods or work procedures?

  6. Supervision exercised. How many people does the incumbent supervise, directly and indirectly? What responsibility does he or she have for controlling policy decisions, costs, or work methods?

  7. Consequences of error. If the incumbent made an error, what dollar loss would be likely to result? How often does the possibility of loss or error occur?

  8. Working conditions. Is there anything in the work environment that is unusually hazardous or uncomfortable? For what percentage of the time is the incumbent exposed to such conditions?

  9. Mental, physical, and visual demands. What degree of concentration is required? Are there special physical demands? Is eyestrain likely?

  10. Confidential data. To what extent is the incumbent responsible for confidential information? What would be the consequences of unwarranted disclosure? To what extent are integrity and discretion important?

Each of these factors falls under the four categories of skills, mental and physical effort, working conditions, and responsibilities. Documentation of specific and relative work factors comes from the job descriptions. Observable efforts must be job-related and can be difficult to determine at times due to subjectivity. The outcome provides employees with a clearly defined evaluation.

Benefit 4

A consistent approach to evaluating jobs and applying job factors to determine compensation levels for each role ensures compensation levels match the job description, complexity of duties, and value created by each employee. As a result, you can expect engaged, satisfied, and productive staff.


Value Proposition:

Compensation plans connect expected employee behaviours with organisational strategy, goals, and objectives. Organizational effectiveness and efficiency can only be expected when there is alignment in these areas. Employing the right person for the right job begins with a clear articulation of expectations, performance, and elements of success.

Rewarding employees both financially and intrinsically is an expectation in today’s work place. A compensation program’s main intent is to attract, retain, and grow your staff. It is meant to motivate your workforce, improve morale, meet legal requirements, and stimulate personal growth. It is the most useful tool to develop a high-quality, high-functioning talent pool.

[1] https://hrdailyadvisor.blr.com/2010/02/24/10-critical-quot-compensable-factors-quot-in-job-descriptions/ (Accessed 01/17/22)


About the Author:

Murray Doucette has over 25 years of experience in various senior executive roles. Most recently, as the CHRO and VP of People and Culture at London Health Sciences Center, one of the largest teaching hospitals in Canada, formerly the Associate Superintendent of Human Resources for the Vancouver School Board. He has an MBA in Human Resources, is a Certified Health Executive, and a Certified Human Resources Executive.


Murray also possesses certification in Leadership and Inclusion, a programme that delves into the field of diversity and inclusion in leadership settings. He is certified as a "Just Culture Champion" and has completed "San'yas Indigenous Cultural Safety Training" certification. His experience as a generalist in the human resources field has given him the expertise and experience needed to consult on the most complex human resources challenges.


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