Соmреtіtіvе Compensation Рlаnѕ: Hоw Tо Dеѕіgn Рlаnѕ Thаt Effortlessly Attract & Rеtаіn Star
Updated: Dec 10, 2021
Employee voluntary resignation rates haven been on the rise since 2010. bееn on thе rіѕе ѕіnсе 2010. And if the data from the bureau of labor statistics (BLS) is to be taken seriously (it should!), poor compensation gripes rank among the highest causes of the ever-increasing employee attrition rate, according to SHRM. A great retention rate can help your organization maximize profits by up to 400% while saving you the high costs of replacing trained employees. You need to get your compensation plans right to prevent good employees from leaving.
It is very important that firm has a deep knowledge of the basis of designing market-based compensation plans. This will not only make firm's workforce immune to poaching from competitors but also support the organization's strategic business goals.
What Dоеѕ Іt Mеаn Whеn A Salary Іѕ Соmреtіtіvе?
For anyone who's spent time searching for a job, you may have come across the same hiring buzzwords over and over again. A phrase commonly used in job descriptions to attract top talent is "competitive pay." While these two words are enticing to those looking to level up their earning potential, it's not always clear what it really means. When it comes to compensation, the label "competitive" refers to pay that is comparable to or better than the market value of a position. In human resources, a competitive salary is the average market rate for the role, plus a percentage of that rate. This percentage may vary depending on a company's pay philosophy. It also means that compensation is competitive in relation to what other companies might offer for a similar position in the same industry and geographic area.
Why Is Соmреtіtіvе Compensation Іmроrtаnt?
One of the common mistakes for employers is overlooking the importance of providing a competitive salary to their employees. This is because they see it as an expense when supposedly, it is an investment.
First of all, what doe sit mean to pay a 'competitive' salary? This basically means the salary you pay to your employees is comparable to the market. For instance, for a similar job, a competitive salary is equal to or above the standard offered by companies in the same industry or geographical area. A common HR practice offers within 10% above or below the market average for a job as a basis for competitive pay.
Here are some of the major reasons why paying your employees a competitive salary is important.
Рауіng lеѕѕ tеndѕ to be mоrе соѕtlу
Іt is essential for employers to consider that one of the primary reasons for employee turnover is salary. Employees who feel they are not well compensate tend to look for higher-paid work elsewhere, quit and move on. And this costs companies a huge amount of money because it is costly to recruit and train new employees for replacement. Therefore, the cost of hiring a new employee exceeds the amount of money you think you saved by offering lower salaries.
Low pay could dеmоtіvаtе еmрlоуееѕ
Salary is a primary extrinsic motivator for employees. And no one can deny that people work and want to be paid fairly. Workers that feel they are being paid fairly are more likely to stay motivated and go the extra mile to help their company achieve its goals. So when employees feel they are paid less than others who have a similar job to theirs, they can become demotivated and less invested in their work.
Hіgh рау іmрrоvеѕ mоtіvаtіоn аnd productivity
On the other side, employees are heavily motivated with higher pay. By having a competitive compensation, employees often feel valued and appreciated, which is often tied to enhanced performance and productivity. A happy and motivated employee treats clients with passion. In turn, employers can demand a higher quality output from them.
Tор tаlеntѕ аrе аttrасtеd tо hіgh salaries
Talented employees know what they are worth. When your company is not offering a competitive salary, the candidate won't likely accept the offer. Not having a competitive salary can hinder companies from being able to attract talented employees, even though there may be many candidates in the market. It is important to be aware that if their values do not meet with your salary offer, then they will likely end up with your competition. And this could become a threat to you because their capabilities can enhance the competitors performance over yours.
Hіghеr рау іmрrоvе thе соmраnу’ѕ stakeholders
So, when employers invest in their employees, they will have more economic opportunities to improve their lifestyle. Employees who have more money tend to spend more money boosting not only their well-being, but also making a positive impact in the community where your business may operate. It is a win-win for businesses to have a positive employer brand, and as an old adage says, what goes around, comes around. This cycle applies to your business as well.
Whаt Аrе Thе Fоur (4) Activities Mаrkеt Соmреtіtіvе Pay Ѕуѕtеmѕ Аrе Bаѕеd Оn?
Generally, the market competitive pay systems are based on some activities. Here are the major ones you a firm should adopt:
Identify rоlеѕ within уоur оrgаnіzаtіоn (сurrеnt and future)
One of the first things to do will be to identify and analyze all of the job roles within your organization. This includes both current roles and future roles. This is necessary to help begin your strategic and comprehensive approach to competitive compensation. After identifying roles, you will want to set salary brackets for these roles with regard to the job titles and descriptions.
Fоllоw up wіth an extensive competitive analysis
To design a great compensation plan, it either has to be on par with the market or higher than it, whichever makes sense. This is where a thorough competitive analysis comes in. The competitive analysis will help uncover what competitors pay for similar job profiles. This data will include what similar employees are being paid per hour, per week, monthly, or annually by other organizations similar to yours.
Consider grоuріng rоlеѕ іntо jоb fаmіlіеѕ
After identifying and analyzing current and future job roles, it makes sense to then group jobs into families or classes rather than adopt a singular pay grade system across different positions. Some organizations choose to group jobs into administrative, management, technical and executive job families, etc. It might also make sense to group jobs based on geographic locations, among others.
Аnаlуzе ѕuррlу and dеmаnd dуnаmісѕ
The factors of demand and supply can impact what will be considered a competitive and attractive compensation plan for an employee. If for example, the organization is looking to fill a role with candidates with specific qualifications, with those candidates very few in the market, the organization might consider paying more to attract qualified candidates, even if this means going slightly above the market average.
Сrеаtе a policy fоr commissions and bоnuѕ
Payroll and hr should also work together to develop a policy for commissions and bonuses as well as for rewarding high performance. Commissions and bonuses might serve as a clever way to augment lower-than-market base pays, as well as keeping your current workforce motivated.
Fасtоrѕ That Determine Pay Competitiveness
The market value of a position can fluctuate depending on a variety of factors such as industry and location, so it's important to note that pay may vary, and it isn't necessarily by a specific amount.
Here are the major factors that can affect compensation:
Jоb tіtlе
When it comes to determining a competitive salary, the role itself will often have a baseline for market rates.
Experience lеvеl
Most positions will offer pay that corresponds to either your experience level or the experience necessary for the job. Whether the role is entry-level, mid-tier, or higher, often determines the experience level required and the associated salary range.