Compensation Management is the lifeblood to most of the enterprises. Every business wants to dominate Compensation management, which is simply because a good compensation management model is able to inspire employees, boost morale, motivate your talent, and promote enterprise performance improvement. On the other hand, poor compensation management can also cause the productivity and sales performances to a standstill situation.
The following four points are the most common scenarios when it comes to a poor compensation management.
(1) Unclear Pay Philosophy
Before you build a skyscraper, you should build a very strong foundation first. This same philosophy applies in compensation management. Before we build the compensation structures, we need to have a clear pay philosophy. Based on Mercer Consulting’s “3-P Model”, there are 3 common pay philosophy used, which are:
- Pay for People
- Pay for Performance
- Pay for Position
For example, if your company’s pay philosophy is “Pay for Position”, and you don’t have every employees’ Job Description updated, clearly, you are already off to the wrong start.
(2) Outdated Compensation Structure
To maintain a strong compensation structure is imperative for any organization. If your compensation structure is outdated, you may end up paying your employee way too much, which will increase your company operation cost, Or you may end up paying your employees way too little, which will make it extremely difficult to retain your top talent.
Not to mention that there are still some companies that do not even have a compensation structure. In fact, in most private enterprises, when it comes to compensation decisions, they end up using the “Pay for Faces” model. This means there is no supportive data and/or scientific basis to trace their reasoning. This is because of two problems:
- They still do not realize the need to establish a compensation system.
- Human Resources management is weak. Usually meaning the human resources process in those companies are mostly carried out by non-professionals.
(3) Lack of Incentive Plans
Total Cash Compensation (TCC) includes basic salaries, fixed cash allowances and incentives (including both Short and Long Incentives).
When Human Resource professionals launch their compensation competitive analysis every year, Annual Base Salary(ABS), which is your monthly salary X 12 month, and Total Cash Compensation (TCC) are the two key points HR professionals have pay attention too. ABS decides whether you can attract new hires, especially fresh graduates; TCC decides whether you can retain your top employees. Most importantly, Incentive Plans are the core factor in TTC. There are 3 types of mistakes that I have come across regarding incentive plans.
- Firstly, there is no Incentive Plan, and employees’ total cash is basically their monthly base salary times 12 months.
- Secondly, companies do have incentive plan, but it is the same to everyone, including sales and non-sales.
- Thirdly, in order to drive revenue, the targets are too aggressive for the entire company to reach.
With any or all of the above, it will put your compensation management structure, and in turn your organization, at risk.
(4) Obsolete Performance Review & Evaluation Tool
“90% of companies now require employees to participate in variable pay plans based on performance, up from about 50% two decades ago” - according to a survey of 1,100 U.S. companies by human resources consulting firm Aon Hewitt in 2013. From this survey, we can see that “Pay for Performance” is commonly used now days, however, I have seen performance management handled in so many different ways. Some companies do not have standardized guidelines or tools for performing performance reviews. The only “tool” they have is a piece of paper which listed 20+ questions from each line manager, and scores were given based on employee’s answers. This is very inefficient, not to mention different line managers may have different questions, which can lead to bias. If the performance review results can’t be aligned, then there is no way we can perform Compensation management effectively.
As the old saying goes, “Compensation is not the reason you retain your key talent, but for sure it could be the reason they leave”. In order to keep your key talent, avoid these 4 mistakes, and be sure to invest whenever necessary, choose wisely, and be smart about your compensation solution.
About HRsmart
HRsmart, headquartered in Richardson, Texas, with its UK Offices based in Sheffield is a leading global provider of unified talent management solutions. The unified HRsmart suite provides organisations of any size the insight they need to thrive in today’s business. For more information, visit www.HRsmart.com/uk To follow HRsmart on Twitter, go to http://www.twitter.com/HRsmartEMEA. To read HRsmart’s talent management blog, visit http://blog.hrsmart.eu/
