 Compensation is one of today’s hottest HR topics, as pay transparency laws, inflation, and talent shortages impact employers nationwide. Lisa Shuster from iHire, explains how to offer competitive, equitable salaries while proactively preventing pay compression.
What recession? A recent iHire pollOpens a new window showed that 77.9% of U.S. employers gave pay raises between September 2022 and February 2023. Raises were given for various reasons – including merit, performance, and cost of living adjustments (COLA) – suggesting companies prioritize employee engagement, job satisfaction, and financial health despite economic concerns. Of the 22.1% of surveyed employers who had not given raises, 32.6% said they were preparing for an economic downturn and tightening their budgets.
Undoubtedly, compensation is one of today’s hottest topics in HR, as pay transparency laws, inflation, and the tug-of-war for talent impact organizations nationwide. Employers who aren’t offering competitive, equitable salaries risk losing their best employees and struggle to attract candidates. Moreover, those who do not proactively address pay compression (when new employees make as much or more than tenured employees) can hurt existing associates’ morale and drive turnover rates.Â
Six Effective Compensation Strategies
But before you rush into giving raises or adjust pay scales to avoid falling behind the competition, take a step back and embrace these six compensation strategies:
1. Conduct market research to determine your pay philosophy
Establishing the right pay philosophy for your organization starts with researching market data. What are similar companies paying for the same jobs? The Bureau of Labor Statistics (BLS) is a great place to begin your research, as are HR associations, staffing firms, and compensation management software tools. Matching the market is the most common pay philosophy (paying at the median market rate or the 50th percentile), but you may want to lead the market for hard-to-fill positions.
2. Prepare for market changes.
Determine how you’ll adjust pay as the market changes. Will you offer annual raises for merit, performance, or COLA? On average, companies give employees a 3% pay increase each yearOpens a new window , but that number may reach 4.6% in 2023Opens a new window . Giving bonuses is another way to help keep up with market trends and does not lock you into a particular pay scale when the market is volatile. You’ll also avoid incurring additional costs associated with 401(k) matches, insurance, and taxes.Â
3. Address inequities with a compensation study
Along with researching the market and determining how externally competitive your pay will be, analyze how you are currently paying employees in each role and level. Here, look for discrepancies, such as if two software developers have similar responsibilities, but one receives a lower salary because they lack formal education.Â
Sometimes, your pay scale may need to be narrower or better structured for certain positions. For instance, a Graphics Designer II could make more than a Graphics Designer III, although III is a more senior position. Again, consider your market research when resolving these inequities, and make adjustments before you advertise for a new position to prevent pay compression.
See More: Achieving Pay Equity: HR Data Might Be Your Secret Weapon
4. Adopt pay transparency practices
 Talking about salary may have once been taboo, but today’s employees aren’t shying away from sharing pay details. In addition, states and some individual cities are implementing pay transparency lawsOpens a new window , requiring companies to include salary ranges in job ads and disclose those ranges upon request. Therefore, if pay compression occurs in your organization, your employees will likely find out sooner rather than later.Â
Get in front of the problem (and ahead of the game, as more jurisdictions will adopt pay transparency laws) by educating your employees on how you set your pay scales and why those decisions are made. Your staff will appreciate your honesty, and you’ll build trust across your organization.Â
See More: How to Make Pay Transparency Part of HR Strategy
5. Recognize that counteroffers are counterproductive
As job-hopping continues during the Great Resignation, the odds are that an employee has approached you with a competing job offer. Counteroffers lead to pay compression and don’t necessarily guarantee that the employee will stick around. One study showed that 80% of employeesOpens a new window who accept counteroffers quit within six to 12 months. That’s because money is usually not the only reason an employee is searching for a new job; convincing them to stay with a raise only postpones their eventual departure.Â
6. Share total rewards statements to paint the full picture
Also called a hidden paycheck, a total rewards statement details all the benefits aside from each employee’s base salary or pay. This may include stipends for gas or home office equipment, your coverage of health insurance premiums, bonuses, paid time off (PTO), employer-paid taxes, and more. Providing associates with their total compensation statement can be eye-opening and shows that you are treating them well and not just providing a standard paycheck. Most payroll software can generate total rewards statements, so you shouldn’t have to create these manually.Â
Similarly, communicate other non-monetary perks to your employees and candidates, such as flexible scheduling options, volunteer days, and professional development and training opportunities. Especially when budgets are tight and competitive pay is table stakes, you’ll need to offer more than a paycheck to attract and retain talent.
Getting paid right requires a strategic approach involving external market research, internal compensation studies, attention to pay transparency, and consideration of benefits beyond base salary. However, don’t set and forget your pay scales – revisit your compensation philosophy yearly to ensure your offering is enticing and fair as the market changes and your employees’ needs evolve.Â
Which strategies have you implemented to keep your employees engaged and motivated? Let us know on FacebookOpens a new window , TwitterOpens a new window , and LinkedInOpens a new window .
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