How to keep your compensation budget during a war for talent

By Doug Fletcher

The labour market crunch, long predicted by demographers, is here and will be getting worse. The unemployment rate in the Vancouver for November, 2006 was reported by Statistics Canada as 4.3%, which most economists would say is equivalent to full employment.

High demand jobs now include positions in every part of an organization, in virtually every industrial sector. When an employee walks into the HR office saying “pay me or trade me,” it is tempting to ante up just to avoid another prolonged search. But an ad hoc approach to salary administration in a hot labour market will quickly lead to blown salary budgets and internal inequities that may do serious harm to an organization’s business strategy.

The keys to survival:

  1. Understand your business strategy and its impact on your approach to compensation.

    • Is your organization an innovator that succeeds through quickly bringing new products to market, or a conservative cost leader that needs to be as efficient as possible in order to maximize net operating income? Or do different parts of your organization have different orientations?
    • The types of behaviours required of employees for the organization’s success will differ depending on the business strategy. Your compensation system needs to be built to reward the required behaviours in your organization.
  2. Develop a total compensation strategy for each discrete segment of your workforce.

    • Your total compensation system consists of direct pay (cash compensation and incentives), indirect pay (benefits), the kind of work performed, and the training and development opportunities provided.
    • You don’t have to be a market leader in base pay if you have significant non-monetary incentives! But you do need to realistically appraise your total compensation system, not just pay, to see where you stand.
    • Each discrete employee segment may need a separate total compensation strategy!
  3. Determine the role for compensation in that strategy, taking into consideration all that your organization offers.

    • After you have figured out how direct compensation fits in with your total compensation approach, determine how much of it should be based on performance, and whether the basis for performance pay should be individual, group, or organization-wide performance (or a combination of two or three of these).
  4. Determine the basis for your pay policy: market comparison, paying the job or paying the individual.

    • While some jobs will tend to always be priced in market terms (senior executives and some very “rare” job skills), organizations of more than 15-20 employees will need to have some kind of system for administering salaries.
    • There are two basic kinds of pay systems:
    • job-based systems utilize job a rating system of some kind that considers the knowledge, skills, abilities and working conditions required of the job as the basis for setting pay
    • person-based systems use individual attributes as the basis for setting pay.
  5. Determine the competitive position of your total compensation in the market place.

    • For each compensation strategy in your organization (one for each discrete employee group), one of the key considerations is the competitive position of your total compensation package versus the market.
    • A conscious decision to lead, match, or lag the market will help you when faced with those tough “pay me or trade me” moments.
    • It is also important to keep your pay data up to date in a hot market so you don’t fall behind your target.
  6. Develop the pay policy and implement it confidently.

    • Determine the value of each job in your organization (or benchmark the competency or knowledge-based pay plan).
    • Test it out on the entire existing employee data base so you understand completely the implications of your pay system prior to implementing any changes.
  7. Make exceptions when absolutely necessary and document them!

    • Do you have a star employee that is ticketed as a key player in your leadership program? Don’t lose that star just because they don’t fit your salary administration program—but make sure you can document why some individuals may get treated differently.

About the Author:

Doug Fletcher, BA, MIR, CHRP is the Program Co-ordinator for Kwantlen University College’s BBA in Human Resources Management and Post Baccalaureate Diploma in HRM programs (see http://meadow.kwantlen.ca/moodlehrmt). Doug has an extensive HRM background that includes corporate compensation and benefit roles with Canadian Pacific, American Express, and Hostess Frito-Lay. Doug can be reached at doug.fletcher@kwantlen.ca.

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