The Great Resignation is among the most significant events in recent U.S. history. We are seeing a post-COVID-19 generation refusing to work under the same conditions as they did before. The U.S. is facing the most prominent labor shortage of the decade, and positions that require high-demand skills are harder than ever to fill.
Midsized companies are finding it particularly hard to retain qualified personnel. Confronted by notable resource constraints, smaller budgets and workers’ demand for flexible solutions, the problems for SMBs are as great or even more significant than for larger organizations.
One way to make your company attractive is by developing attractive compensation strategies and increasing pay transparency and equity. Employees don’t always leave or stay because of their pay, but an opaque model for allocating compensation exacerbates feelings of disconnection and lowers engagement.
Let’s dive into how startups can benefit from compensation analysis, and how they can utilize available data to develop a comprehensive compensation strategy.
Understanding the complexity of compensation
Pay equity is one of the most pressing social issues today, and any discrepancies can have adverse spillover effects on reputation and company relationships.
The amount that lands in an employees’ bank account is just one fragment of today’s compensation packages. Compensation can consist of a base salary, annual cash bonuses and long-term incentives.
When stirring a compensation mix together, there are different trade-offs to consider:
- Fixed versus variable compensation: Base salary compared with bonuses.
- Long-term incentives versus short-term incentives: Short-term incentives can be in the form of annual bonus structures. Long-term incentives are usually stock or other forms of compensation that vest over the years.
- Cash versus equity: Equity can include stock options, restricted stock and performance shares.
- Group incentives versus individual incentives: You could implement a percentage-based salary increase for all positions or give bonuses to select employees.
It isn’t ideal to have a uniform policy for all positions and departments. Managers should explain their reward decisions on an individual level, and compensation decisions should reflect the skills and contributions of every employee. In addition, companies are bound to have varying budgets (e.g., higher revenue during the holiday seasons) and philosophies on allocating them.
Many make the mistake of sticking to an approach that doesn’t pan out from a strategic standpoint or doesn’t motivate the team enough. Instead, managers should gather data, work through various analyses and scenarios and design a compensation strategy tailored to the company. This is where compensation management software comes into play.
The devil is in the data
Data will help you understand where the talent market is headed and where your company stands.
One way to obtain data on the market, roles and industry is to look for existing databases, such as the Mercer database, which has data on 6,600 positions in the U.S. Such findings are often based on broad surveys and data from hundreds, if not thousands, of companies.
Public databases are a good starting point, but what kind of information and data your company needs beyond that depends largely on your business’ needs. Startups often work in niche industries with few available public reference points, so they may consider conducting a survey.
Data can be harvested from a smaller sample in the same sector. This may include information on the skills and abilities required for a particular job or measures used to evaluate performance. Educating yourself on these topics can be challenging, but it is essential for making the right compensation decisions.
Let’s say you analyze the data for a product manager role at a startup, but can’t find any data on a comparable position. You can use a similar but lower position as a baseline for pay grades, and then increase the position’s value, accounting for the additional value this position is expected to bring to the company, the skills required and the quality of work.
Companies that want to conduct a custom survey should follow a few guidelines. When time and money are tight, keeping a survey simple and short is critical to its success. If doing a survey isn’t possible, you might want to pay for tools available at Glassdoor or LinkedIn to obtain insights.
Once you have the data, you can upload the data files to your compensation management software and perform your initial analysis.
Analyze to optimize
It is vital to confirm the alignment of your employee development plan with current HR trends in your industry, geographic location or among organizations of similar size. You should check a variety of analyses to set the framework for a compensation strategy.
Market data comparison
Compare your internal payroll data with the market average, considering companies’ relative size, salary ranges of other organizations and salary levels in different regions. You can ensure your peers won’t gain the upper hand with their retention strategies by being competitive on this front.
You can also identify local competition for talent in different industries or markets. However, market data is only part of the equation — it should never be the only yardstick, as it cannot provide a complete picture of what is appropriate for compensation in a company. So, make sure to dig deeper.
Labor cost analysis
Personnel expenses are a significant component of operational costs and include what employees are paid for their contributions, both physically and intellectually. Labor cost analysis is basically about figuring out how the company makes money and whether it has competent personnel to remain profitable.
This requires you to merge payroll data — such as base salaries, bonuses, overtime pay and benefits — to determine overhead costs, revenue growth, profitability and the skills needed for growth.
Let’s assume an analysis for a competency-based compensation system reveals that a company needs to increase compensation significantly to prevent employee churn. Here, managers must conduct a labor cost and business analysis to determine how much revenue growth must be achieved through increased employee competency before they can approve a raise.
Retention analysis
By reviewing risk of flight, you can get insights into the likelihood of your employees leaving and set enticing incentives accordingly.
Employee satisfaction is a key metric in retention analysis. How you measure this is up to your ingenuity, but businesses often turn to surveys, personal interviews or assess the overall motivation an employee exhibits. One way to do this is to assign values on measurable scales, creating an index of different factors.
That said, flight risk cannot be measured only by the somewhat subjective perception of satisfaction. It helps to evaluate industry compensation benchmarks and link them to data on employees’ roles. For example, some companies have thresholds such as six, 12 or 24 months, when employees are more likely to look for new opportunities.
Startups can have higher turnover, and it can be challenging to find the right fit straight away. One way to use this analysis is to adjust compensation at these thresholds.
High-performer analysis
You can identify quality talent by analyzing performance levels and correlating them with rewards, training, previous work experience and education.
Identifying top performers is a critical step in this process. In some companies, top performers make up only a few percent of the workforce. However, on average, they produce up to 61% of the work. To recognize top performers, look at quality metrics such as NPS scores and client praise.
Once the top performers are identified, employers must ensure they are rewarded appropriately. Businesses usually use a merit matrix to distribute commissions or dividends across the various performance indicators fairly. A department can develop guidelines for its pay review process and then measure how closely each unit adheres to those guidelines. The guidelines can include factors like actual revenue compared to expected revenue or quantitative performance compared to average team performance.
Geographic pay analysis
Companies with international teams should sort their salary structures by location and adjust base salaries when reviewing payroll costs.
The global talent market demands compensation differences, because retirement benefits or costs vary significantly across countries. For example, Silicon Valley companies adjusted their salary slips based on where workers relocated during the pandemic.
This data can help teams make informed decisions about expanding their business or outsourcing work to people living in less costly areas.
Pay equity analysis
To facilitate a culture of equity, analyze your data and positions for inconsistencies or discrepancies in salaries. Pay equity is one of the most pressing social issues today, and any discrepancies can have adverse spillover effects on reputation and company relationships.
The data required for an accurate assessment of pay equity include base salary, bonus structures, job classes and performance values. Comparing each individual in a team alongside these factors will help identify anomalies.
Develop dynamic visualizations to spur dialogue
Keeping employees in the dark about why they receive a base salary or bonus will lead to mistrust. Employees may not feel valued enough if they only look at their paycheck and can’t understand their contribution to the business’ development. Each compensation decision must always have a “why.”
Constant dialogue with employees lies at the heart of talent development. It will help you deliver transparency, set clearly defined goals that align with your course and find motivating incentives for your employees. Dashboards giving a graphical representation of new compensation plans and their long-term development will facilitate such conversations.
Further, showing potential hires a dynamic visualization of their likely future salary and how their performance will influence their compensation will change your talent acquisition game permanently.
Lean on creative compensation methods
According to FW Cook, 83% of the 250 largest S&P 500 companies have historically relied on a formulaic annual incentive plan with predefined metrics and weightings. However, in the face of the pandemic, many businesses adjusted their compensation planning to correspond to the unique labor market and budget constraints. At large companies, flexibility requires innovative and creative thinking and the willingness to test, fail and learn.
Smaller organizations are more agile and can drive more disruptive solutions to address challenges. The pandemic taught us that flexibility is key to growth. The companies that quickly took advantage of the skyrocketing demand for digital engagement could lead their industries forward.
The necessity to embrace change and be open to adjusting processes holds true for compensation planning as well. For example, startups often pay their employees for their pre-tax expenses such as parking, subway passes, gym memberships, hardware, snacks or the occasional lunch.
Flexible incentive design may be difficult, but it isn’t impossible. By leveraging analytical compensation management, you can make it happen.