Having a well-designed compensation plan that ensures equity, should be a high priority for all employers. For any person to feel motivated to work, they should feel they are paid fairly according to what they do. Every employee desires to feel fairly treated and equal to his or her peers, and people instinctively sense unfairness, which can have a very corrosive effect. Don’t you think this can affect their efficiency and effectiveness?
This is one of the main reasons why you should focus on developing a fair compensation strategy for your company, apart from any legal obligations and liabilities.
Before looking into the “how,” let us have a look at WHAT is fair compensation.
Fair Compensation
Compensation is the total cash and non-cash payment that you give to an employee in exchange for the work they do for your business. This is typically one of the biggest expenses for most businesses. But compensation is more than an employee’s regular base pay. It can include many more elements including their overtime allowances, bonus pay and other incentive-based payments, recognition and rewards, and many more.
This pay can depend on organizational traits such as the industry, turnover, profitability, size as well as any affiliations. As an example, you would have noticed that many local organizations that deal with foreign clients (especially European or American) pay higher salaries and better benefits/ allowances when compared to their counterparts. This is partly because it is mandatory for such firms to align with foreign fair compensation practices, and sometimes even pay scales, in order to be eligible to become a supplier for those foreign clients. For your employee compensation to be fair, you also have to make sure that you compensate them according to what they do, their responsibilities, their designation and the current compensation rates/ standards in the job market, or those recommended by professional organizations. In some industries, pay scales may be fixed by negotiations with trade unions, or subject to government recommendations.
WHEN do you have to do this?
A fair compensation strategy is a must-have in any company, and should not be left for later. Whatever the crisis company may be in, whatever the growth stage the company is going through, or how bad the country’s economy is, the company is legally obliged to pay its employees on time. When the company is going through a crisis, merger or any kind of change that affects the scope of work of employees and the operational model of the company, it is important to revisit the compensation strategy/ policy and make necessary amendments.
HOW do you pay your employees?
There are many ways to determine an employee’s fair compensation package. No matter how you determine employee wages, you should consider internal equity. Internal equity is when you compare the positions in your business to ensure fair pay. At the very early stages of your business, matching the industry standards and offering considerably high compensation can be a little tricky and nearly impossible (unless you have a considerably large capital reserve). If YOU are also paid by your company, best practice would be to pay yourself from your profit and not revenue.
However, apart from the above-mentioned points, you always have to make sure that
- The compensation has to be impartially and honestly determined in an objective manner based on merit, without any favour or prejudice
- Every person at the same level of seniority who does the same type of work, has to be paid equally, to ensure internal equity
- Compensation, and particularly any later revisions, has to be determined by a thorough analysis of objective performance results wherever possible, rather than a subjective evaluation by the supervisor
- Confidentiality – all employees should be encouraged to keep their compensation private, and no one who is not in charge of compensation should be able to find out the compensation of any other employee
- Market rates. If you find that your total compensation value deviates too far from market rates, you will have a problem. If you are underpaying, you will not be able to attract or retain the best talent. If you are overpaying, unless you are following a specific strategy, you will be placing yourself at a disadvantage to your competition, and possibly creating bad incentives for your staff.
In conclusion, the productivity of the company, the efficiency of the employees and the attraction and retention of the best candidates, will rely on their positive attitude towards the company, and compensation without a doubt plays a major role in shaping their attitude towards the company. Neglect these considerations at your peril.