The term Compensation Cycle can send a shiver down the spine of even the most experienced HR executive. A multi-faceted approach that entails both a deep dive into your employees competencies as well as an external benchmarking process of where your company sits in the wider market.
Sounds simple? It very much isn’t. But it can be…
However, for both the retention of your workforce and also the future employment of candidates, a thorough Compensation Cycle is carried out a couple of times a year by most companies.
What is a Compensation Cycle?
A compensation cycle is the process of reviewing all of the elements of your employees remuneration – including salaries, benefits, incentives, equity etc. – and then measuring it against both a company’s business strategy (internal) and the wider marketplace (external).
If there are inconsistencies in your organization then compensation cycles can be a great opportunity to smooth out the disparity experienced between employees and departments.
Ready to take the plunge?
Compete has outlined the 6 key steps you should take to successfully conduct a Compensation Cycle.
- Total budget
Establishing your total budget is the first step in the process and determines how much you have to spend on pay raises or bonuses. This process is normally conducted with the company’s CFO who will indicate how much budget there is to play with. The total budget is influenced by a number of factors including the financial performance of the company in the past year.
- Who are we talking about
Before you can determine who will be receiving a pay increase and how much, you must first identify who is eligible for additional remuneration. An effective way of doing this is to firstly rule out those who are not eligible.
Take your overall list of employees and rule out those that have recently joined. Your company may have a policy about how long an employee is required to be with the organization before they are eligible for a review. Other employees may have only recently had a pay increase due to an off-cycle review or an unplanned bonus. There may also be additional circumstances that disqualifies an employee from taking part in a Compensation Cycle. For example, during an economic downturn senior management may decide to freeze their salaries whilst the company is going through that period of uncertainty.
Your list of eligible employees is very rarely the total number of participants in a Compensation Cycle. Filtering first will help you identify who is eligible.
- Who are you key employees (talent mapping)
Richard Branson once said: “Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.”
Step three in the Compensation Cycle is to listen to Richard Branson’s words and take them a step further by identifying who your key employees are.
“Key employee” can mean different things to different people. A key employee may be a senior executive who plays a business critical role in the organization. They could also be someone identified by managers as having great potential to be a future leader. Take stock of your entire employee group and spend some time thinking about which of those employees are truly “key” to the future of the business.
Identifying key employees is only one part of the talent mapping exercise. HR executives who go one step further and take time to understand the individual motivations that drive these individuals will then be in a strong position to galvanize their employees with the appropriate remuneration.
Bottom line, a key employee is someone who should be given special attention during a Compensation Cycle.
- What’s your strategy?
Ok. So you’ve identified the ‘how much’ and ‘who’. Now is the time to set your strategy.
What are your company goals? What are your red lines? The process of establishing your North Star will help you set the wider goals of your Compensation Cycle.
Your strategy should be rooted in the realities of the company and the environment it finds itself in. It should also be realistic and take into account the short and longer term goals of the company.
The strategy of a company undergoing cost cutting, for example, will differ from one that is going through a period of headcount growth. Maybe you are looking to grow a specific part of the business and need to hire different types of roles or focus on internal mobility.
With your total budget established and eligible employees identified, do you want to provide an across the board percentage increase or reward your key employees more than others.
All of these factors inform your strategy which should be unique to your business.
Once your compensation strategy is clearly defined it will then be easier to make the individual decisions.
- Benchmark, benchmark, benchmark
If you have been following the steps so far, you will have a detailed understanding of one side of the coin, namely your employees and internal structures.
The other side of the coin is of course to benchmark the organization and compare it to the wider market. Visibility into common compensation and benefits practices is a must for developing workforce management strategies. Map those eligible employees against the market, establish who is underpaid and analyze exactly where your key employees are placed in the market to spot any risks.
When analyzing market conditions it is key that your data is:
- Real-time: Depending on the industry vertical you sit in, salaries and benefits can change regularly. Having up-to-date information is incredibly important when benchmarking.
- Like-for-like: The salaries and benefits of a 30-person Round B start-up in cybersecurity is going to be dramatically different to a 10,000-person cloud computing company on the Stock Exchange. Check that your data is an ‘apples to apples’ situation.
- Looking at the complete picture: For most people their salary is the key driver when deciding to join, or stay, at a company. However, a salary is not the whole story. Benefits and other incentives are an important part of the conversation and shouldn’t be ignored when addressing the total compensation value of an employee. From equity, to work from home policy, to health insurance, to parking, to parental leave. The list of benefits that your employees might consider important is long and should be benchmarked against the wider market. Often the biggest changes in the industry have been the area of benefits.
- Make the call
Based on all of the extensive factors listed above you can now decide what salary or benefit adjustments you want to make per eligible employee, safe in the knowledge that you have taken into account all internal and external considerations.
This stage should see the finance and HR functions working with the hiring manager to have conversations across the company.
Compensation Cycle done right!
Although there are many steps along the way, we believe that a successful Compensation Cycle will ultimately result in a happy and motivated employee workforce. After all, In the everchanging business environment, retaining and hiring top talent is the key ingredient to scaling your company.
If you are interested in learning more about how you can gain a clear view of your company’s employee compensation and benefits benchmarks compared to the market, schedule a demo with us.