How to Design a Competitive Pay Policy

People form a critical lever in organizational success. However, the job market has become ultra competitive with organizations getting neck-deep in the war for talent. While organizations end up spending millions on hiring the right people, they often end up ignoring another critical channel—talent retention. Compensation forms an important part of retention, especially in an open job market where top talent has a number of opportunities to choose from. This calls for devising an infallible compensation philosophy and policy, one that meets the people’s needs and yet meets the strategic goals of the organization. 

Whether you have a compensation policy or not, it is a good idea to revisit it from time to time, in line with the changing business scenario, both internal and external. Here is a step by step process to evaluate and design an appropriate compensation philosophy to ensure you retain and engage the best of talent. 

1. Study the market: You are not the only company fighting for talent, therefore, an external view of the talent market is very important. Study the macro business environment, the growth indicators and the lag indicators, especially in your sector—compensation trends are more often than not linked to these. Temporary slumps and growth spurts can play havoc on hiring prospects, leaving you outdated if you do not align your compensation strategy with the times. This will definitely result in you losing talent to your competitors, who may be better equipped to meet the needs of top talent. Your market analysis should be detailed with a view of locations, sector, job category etc. 

2. Benchmark job roles: The second step is more inwards-looking to understand your company’s pay structure in relation with the job roles. To be able to make a change, you must first know what you are paying whom, at what level, role and function. Salary benchmarking must be done at least once a year; it will help you compare yourself to competitors, and help identify high-risk employees who can take off to competition any time. Tie in the findings to your labor budget to ensure proper resource planning.

3. Develop a compensation philosophy: A compensation essentially translates to what you value in employees, and what you will reward them for. Having a structured compensation philosophy that is in line with the organizational direction helps you take informed and aligned talent decisions, minimizing human bias in the hiring process. This is especially true for growing companies, who often lose sight of how much they are paying, running the risk of going beyond budget on resource costing.

Also, a well defined compensation philosophy and plan ensures pay equity, aids employee retention and employee engagement. A plan consists of defining pay levels, pay ranges, pay mixes, increment ranges etc. for different job buckets. You may also want to pay differentially for particular competencies or contributions. Also, the rewards mechanism may vary, and may not always be in cash payouts. 

4. Scout for pay inequities: Internal pay and promotion inequities, both real and perceived are often a grave threat, making most employees feel undervalued and urging them to leave. Analyze each job position to understand the pay levels in relation to related jobs (senior and junior) as well as related functions (for example sales and marketing). Make sure you also analyze reporting relationships—for example, a manager grade reporting to a manager grade due to a recent promotion is setting up the employee for dissatisfaction. Continuously be on the lookout for inequities with respect to pay, position, grade, workload etc. 

Once a compensation philosophy and policy is put in place, it is extremely important to communicate it to the employee clearly and concisely. Emphasize how the work that your employees do contributes to the big-picture organizational goals, and how the compensation aligns with that. Show your employees how you are investing in them, directly through compensation as well as indirectly (training, leadership visibility, growth opportunities etc.). Communication is critical to ensure a fair and transparent compensation process, and gain the trust of your people.