What is Competitive Compensation?

Firstly, you must understand that compensation includes more than the hourly wage or annual salary. Total compensation includes both direct and indirect comp. Direct comp is in the form of wages - payment for time worked - including overtime and premium differentials. Direct comp also includes compensation for time not worked, which is a huge benefit, like PTO or paid holidays. Bonuses and other monetary rewards (attendance, longevity, reaching goals, etc.) also fall into this category.

Indirect comp includes costs like company-provided uniforms, education reimbursement, and employer contributions to health insurance, retirement, HSAs, FSAs, EAP, life and disability coverages, as well as taxes, unemployment, and workers’ comp premiums.

Being competitive does not necessarily mean you pay the same or higher hourly wages as others. Look at the whole package and find the total value. Additionally, employees should consider the same, especially if they consider relocating. The cost of living is a significant factor.

Second, you must educate yourself on the market value of your roles. To be competitive in wages, you need to know the average wages. Ideally, you should perform a comprehensive study every two to three years. These studies take a lot of time and effort, depending on how many positions you have, and it is best to have a professional do this for you. In between these studies, you may find that specific positions become more competitive in that it’s harder to attract and retain people within those roles. If that’s the case, then you may need a position-specific update.

When performing or obtaining market studies, they should be industry-specific and job-related. Remember that everyone has a different title for similar positions, and chances are none of you have the same duties/responsibilities for like roles; you each are unique. But you need to obtain data as closely as you can. We do this by researching duties, responsibilities, and qualification requirements.

Market data should consider your geographic area, or you’ll need to adjust the results based on the cost-of-living differences. Wages in California are not the same as wages in Florida. You must take this into account.

Next, you want like-sized organizations to compare. You can look at size differently – by employee size or revenue. Although you want to be as competitive as possible, the reality is that you may not have the financial ability to pay close to or the same as organizations that are much larger than you. If that is the case, think about how you can bring value to your employees in other ways (again, think about what total compensation includes).

Bring Structure to Compensation.

Having a Compensation Program will make your life easier. A Comp Program outlines how compensation works at your organization, when, why, and what pay increases are provided, and how wages are determined for each position. Your program must be equitable, compliant, and defensible; it must be competitive yet fiscally responsible; and the overall program should be transparent to employees.

If you cannot be transparent about your wages and pay practices, you should take a long hard look at why. It may never be a comfortable subject, but it should never be hidden. Sure, there will still be people who challenge or complain about wages and differences in wages. Still, the difference is that you can be confident and effectively defend and explain it.

Compensation Must Be Compliant.

Let’s start with Pay Equity as regulated under the Equal Pay Act of 1963. The EPA prohibits employers from discriminating between men and women by paying one gender more than the other “for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions.”

Inequalities in pay between employees in the same job must be defensible – that means they are for reasons like performance rewards and years of experience.

The next part of compliance is governed under the NLRA, or the National Labor Relations Act, which the National Labor Relations Board regulates. The NLRA establishes and regulates employees’ rights in different areas. One of them is regarding discussions of wages among staff.

Many employers do not like employees discussing their pay, and some may even go as far as to prohibit such discussions. However, please understand that the NLRA protects this right, and you violate the NLRA when you ban such talks.

You must not forget compliance with the FLSA’s exemption status rules - the positions you pay overtime to and those you do not. You must ensure your practices and policies are compliant with the FLSA exemption rules, not only in what positions are eligible for exemption but also in the application (what and when deductions to exempt employees’ salary are allowable).

Many states have labor laws in addition to federal regulations. You should be knowledgeable and compliant with these as well.

Compensation Should Reward Performance.

Unless you provide Cost of Living Adjustments (COLAs), I discourage giving across-the-board increases. Pay increases should link to performance and motivate, reward, and retain high-performing employees, differentiate employee performance, and reward performance accordingly.

Doing so sends a clear message – that excellent performance matters. When you do not strategically link pay increases to performance, you risk lowering the motivation of top performers and encouraging a standard of mediocre performance.

Recognizing and rewarding high performers supports the goal of retaining top talent. This process empowers leaders, but they must take an active role in assessing employee performance, providing regular feedback, and then rewarding performance accordingly.

Successful Compensation Requires Budgeting.

Budgeting is a critical component of running a successful business. Small businesses often do not see the benefit of a budget. However, sufficient funds are vital to planning for business growth. Without a budget, you risk spending more money than you’re taking in or not spending enough to ensure continued growth.

Regarding staffing, your budget allows you to identify whether you can hire more employees, what you can pay for those employees, and what you can allocate to pay increases.

If you are considering COLAs, you should decide what portion of your budget will include those considerations.

Set Yourself Up for Success - Essential Tools.

You need to set yourself up for success when it comes to competitive compensation. As I stated earlier, establishing a Compensation Program will help you tremendously. It will bring structure, ensure you remain equitable in your pay practices, and allow everyone to be on the same page regarding the what, why, and how of pay.

The following are also essential to your success:

• Market Studies

You need to conduct a market study initially when developing a program and then every two to three years after that, to ensure you remain competitive and in line with the market.

• Performance Appraisals

If you provide pay increases based on performance, then performance appraisals are necessary. Formal reviews should occur once a year. Still, they should not replace regular conversations, feedback, and coaching throughout the year.

• Budget

We talked about this and its importance. It is not only a vital component of a comp program, but it is a necessary tool.

• Reward Matrix

You can create a rewards matrix using a spreadsheet. A matrix allows you to see the recommended reward range based on two factors: current pay and performance appraisal results.

Find the parameters on the x-axis and those on the y-axis; the recommended reward is where they meet.

This tool helps you remain equitable when issuing rewards.

Creating a compensation program and ensuring you are competitive and remain competitive is a lot of work. It takes knowledge and skill in this area, and it takes time. Partnering with an expert is the best thing you can do. Hi-Wire HR can partner with you to assess your needs, make recommendations, and develop the necessary program, policies, and/or tools needed for you to succeed in this space. We go beyond just giving advice; we do the work needed to put you a step ahead, so you can easily execute and get back to doing what you love.