Your company is geared up for the new year. Business goals have been defined and the right talent is assigned to make them happen. Have you structured your compensation system to support those goals? Most organizations understand the importance of fair pay, but there’s so much more a clearly defined compensation system can do. It can optimize employee engagement, productivity, financial resources and organizational goals. Employees are your strongest asset and a well-designed and well-communicated compensation plan will make them feel valued.
What is compensation?
Compensation is the cash and non-cash payments you provide employees. It can be grouped into three main categories:
- Financial compensation – Employees receive either a salary, wages, bonuses and commissions in exchange for their time, labor and expertise. Salary and wages are considered base pay, whereas bonuses and commissions are examples of variable pay.
- Non-financial compensation – This form of compensation offers value, but it’s not paid in dollars. It includes employer sponsored health insurance, employer contributions to a 401(k) plan, stock options, tuition reimbursement, profit sharing and more.
- Fringe benefits – This where companies can inject some personality and stand out from the competition. It may include your company’s time off policies (PTO, unlimited vacation, flex hours, personal days, sick days, paid holidays, etc.), any type of coaching intended to advance employees’ career opportunities and recognition programs. Fringe benefits like team lunches, monthly manicures, company parties and more are included in this category.
How is compensation used?
Compensation is used to engage employees and encourage peak productivity. For employers to succeed, employees must feel compensation is based on an equitable valuation of all roles within your organization, industry and geographic location. This includes salary surveys to understand what other businesses pay employees with similar titles and duties, developing detailed job descriptions and performance evaluation criteria. Beyond monetary benefits, 30 – 50% of compensation can come from other areas including health benefits, profit sharing, retirement plans and bonuses. Educate employees about all the features in their compensation package.
What are the five components of a compensation system?
As an employer, it’s important to structure, communicate and administer your compensation plan to support the needs of your business, employees and customers.
Organizational Goals – Make sure to pay employees for their individual performances as well as reward them for efforts which support the business goals of the company, department, and/or team.
Employee Communications – Realistically communicate the company’s compensation program. Ensure whatever the message conveys, it is done so in manner that is fair, competitive, appealing and respectable. If the market conveys a particular value and the employer offers below the market value, then employee dissatisfaction and turnover rates will likely increase.
Rewards and Recognitions – Ensure that project recognition is differentiated from individual recognition; in doing so, each employee’s value and relevance can be more easily identified.
Timely Acknowledgements – Pay attention to the timing of rewards since desired performance should be rewarded as quickly as possible.
Simple Measures – Keep performance measures as simple as possible and limit the number of measures to track.
Since much of the company budget is for employee compensation, each position should ladder up to support overarching business goals. Clearly define and communicate those goals so people know what they’re working towards. Otherwise, you could lose valuable top talent and damage company culture unnecessarily.
What regulations affect compensation?
Beyond state and local employment and tax laws, you should be familiar with the Fair Labor Standards Act (FLSA). It governs minimum wage, overtime pay, equal pay, record keeping requirements and child labor. According to the Equal Pay Act of 1963, men and women must receive equal pay for equal work. With the new Biden administration’s focus on increasing minimum wage, expect amendments to the FLSA.
MidwestHR is a leading CPEO in Illinois (certified professional employer organization). Clients count on our team of HR outsourcing experts to manage all or part of their human resource functions including payroll and tax administration, benefits management, workers’ compensation, performance management and more. We also help clients develop a compensation strategy that encourages employee retention and ensures compliance with local and federal laws. If you’re considering a PEO, give us a call at 630-468-9286 to learn more.