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8 Compensation Mistakes--And How to Avoid Them

An effective compensation program can help you attract, motivate, and retain top talent. To achieve these goals, your program should be fair, competitive, and performance driven. The following are some mistakes to avoid when designing and implementing a compensation program:

#1: Failing to consider total compensation.

Even if your company is unable to offer the highest wages, it can still offer a competitive total compensation package. Total compensation includes both direct compensation (wages, salaries, commissions, and bonuses) and indirect compensation (health insurance, paid time off, retirement plans, etc.). Employers should decide on a total compensation mix that balances attracting and retaining top talent with keeping labor costs under control.

#2: Nonexistent or inaccurate job descriptions.

Accurate, up-to-date job descriptions help establish the foundation of an effective compensation program. Job descriptions define the main purpose of a job, the essential and nonessential responsibilities, necessary qualifications, and other pertinent information related to the role. You can use job descriptions to help value the position and compare jobs within the company and in the external market.

#3: Neglecting the market.

To be competitive, understand how your compensation plan compares with other companies in the market. Review salary surveys to determine what other companies similar in size, industry and location are paying their employees. While salary surveys are available for purchase, the U.S. Bureau of Labor Statistics makes its wage data available for free.

#4: Disregarding internal inequity.

Consider internal equity when making pay decisions. Employees should feel they are compensated fairly relative to other employees within your company. If employees believe their jobs pay less than comparable positions, companies may struggle with lower employee engagement, higher turnover, and potential legal claims. To help promote internal equity, establish a pay structure that is based on objective criteria.

#5: Weak connection to performance.

Merit raises and bonuses are often tied, at least in part, to individual performance. Without a strong link between performance and pay, employees may see raises and bonuses as entitlements or view your payout system as arbitrary. Set clear performance goals and conduct regular performance reviews to help you make informed pay decisions.

#6: Failing to communicate.

Let employees know how your compensation plan works at the time of hire and throughout the employment relationship. For example, some employers provide employees with an annual total compensation statement that lists the direct and indirect compensation the company provided to the employee over the year. This can be a powerful motivation and retention tool.

#7: Prohibiting pay discussions.

Under Section 7 of the National Labor Relations Act (NLRA), employees have, among other things, the right to act together, with or without a union, to improve wages and working conditions. The National Labor Relations Board, which enforces the NLRA, has taken the position that workplace rules or policies that could be construed as prohibiting employees from discussing their wages, benefits and other terms and conditions of employment could violate Section 7. Accordingly, employers should not prohibit employees from discussing pay or mandate the confidentiality of wages, benefits or other terms and conditions of employment.

#8: Violating pay laws.

Review applicable federal, state, and local laws that govern compensation, including minimum wage, overtime, pay deductions, final pay, and pay equity. Understanding the laws that apply to your business and taking steps to ensure compensation plans are compliant can help avoid penalties for violating pay laws.

Conclusion:

Regardless of the size or nature of your business, an effective, compliant compensation program can attract, engage, and retain top employees.

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