HR Tip of the Week

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Is Your Compensation Program Effective?

Is Your Compensation Program Effective?

An effective compensation program can help you attract, motivate and retain top talent. To achieve these goals, your program should be fair, competitive, performance driven and comply with applicable laws. To help review your compensation program, consider these questions.

Have you established a compensation philosophy?

Your compensation philosophy should be the guiding principle behind your compensation program and should aim to attract, motivate and retain talent, while keeping labor costs under control. Your job postings, job offers and employee communications should reflect this compensation philosophy.

Even if your company is unable to offer the highest wages, it can still offer a competitive total compensation package. Total compensation can include both direct compensation (wages, salaries, commissions and bonuses) and indirect compensation (health insurance, paid time off and retirement plans).

Employers may also be able to compete for talent by offering flexible work arrangements and other attractive benefits. Decide on a mix that balances attracting and retaining top talent with keeping labor costs under control. For example, your company might emphasize competitive base salaries with benefits that help employees maintain a healthy work-life balance.

Do you know whether your company's compensation is competitive with similar employers?

This is known as external equity. External equity is commonly determined by reviewing salary data obtained through surveys. Pay data is available from a variety of sources, including the Department of Labor's Bureau of Labor Statistics (BLS), consulting firms, industry organizations, and other third parties, including ADP. Employers should carefully review the sources of the salary data to ensure that they are up to date, reliable, and that proper comparisons can be made.

Are employees' wages equitable when compared with other employees in your company?

This is known as internal equity and typically involves a job analysis and job evaluation. With a job analysis, you gather information about a job's tasks, responsibilities, work conditions and expected outcomes. A job analysis may include interviews with or surveys of employees and supervisors and direct observation. With the job evaluation, you assess the relative worth of a job to your organization by assigning a ranking, grade, or points. Jobs that are more demanding and require more responsibility typically receive a higher grade or ranking, and the compensation would reflect this. Jobs with similar rankings can then be grouped into grades and you can establish pay ranges for each group.

Does your company set accurate pay ranges and disclose them if required?

A pay range is generally the minimum and maximum pay for the job grade and can help give your compensation program structure, control compensation costs and ensure pay equity. The minimum and maximum of a pay range can be determined by subtracting or adding from the midpoint half of the pay spread desired. The example below uses a 30-percent spread.

Example: If a job grade has a midpoint of $40,000 and a 30 percent spread is desired, the minimum in the pay range would be $34,000 (85 percent of $40,000), and the maximum would be $46,000 (115 percent of $40,000).

Several states and local jurisdictions require private sector employers to disclose the pay range for a position to an applicant or employee. Some state and local jurisdictions require job postings to include the pay range for the position. Check your state and local laws for details.

Does your compensation program avoid unlawful pay disparities based on sex, race or other protected characteristics?

Studies have shown that women and people from underrepresented groups tend to be paid less than their counterparts for the same or substantially similar work. Federal, state and local legislatures have enacted equal pay legislation to address this issue. Here are some best practices for ensuring pay equity.

  • Conduct internal audits. Consider working with legal counsel to conduct an internal audit of your pay practices to confirm that employees working in similar positions are paid equitably based on skill, merit and other nondiscriminatory factors.
  • Examine policies and procedures. Review pay-related policies and procedures to ensure compliance with all applicable laws. Develop a clear written equal employment opportunity policy, and include a complaint process for employees to raise concerns.
  • Train supervisors. Provide training on the company's compensation-related policies, procedures and commitment to equal pay.
  • Be open about pay practices. Clearly communicate how the company determines employees' compensation. 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.
  • Don't prohibit pay discussions. Under Section 7 of the National Labor Relations Act (NLRA), employees have, among other things, the right to act together to improve wages and working conditions and to discuss wages, benefits, and other terms and conditions of employment, with or without a union. The National Labor Relations Board (NLRB), which enforces the NLRA, and many courts have found that pay secrecy or pay confidentiality rules violate Section 7 rights. Additionally, some states and local jurisdictions prohibit pay secrecy policies.
  • Promptly respond to all complaints. Take all complaints seriously and conduct a prompt, impartial and thorough investigation.
  • Document. Confirm employment decisions are made for legitimate, nondiscriminatory reasons and properly document all pay and performance-related decisions.

Does your company comply with state and local laws that prohibit employers from basing compensation decisions on an individual's pay history?

More than a dozen states and several local jurisdictions have enacted laws that generally prohibit employers from asking applicants about their pay history and/or using it to make compensation decisions. The idea behind these laws is that a candidate's pay history may reflect discriminatory pay practices of a previous employer, which then could result in lower wages in the new job. Make sure you understand what, if any, restrictions apply to you.

Does your company comply with minimum wage and overtime requirements?

Non-exempt employees are entitled to the applicable minimum wage for all hours worked, which includes productive work time and certain nonproductive work time, such as travel, training, and rest breaks. If a non-exempt employee is subject to more than one minimum wage requirement (such as federal, state and local), you should pay the rate most generous to the employee.

For example, if your state minimum wage is $14 and the local minimum wage is $15, you must generally pay the employee at least $15 per hour, since it's higher than the state and federal minimum wage rates. Additionally, if your business is located in one state, but you have employees (such as remote workers) working in another jurisdiction, the minimum wage in the location where the employee performs work generally applies.

Note: Some minimum wage requirements may only apply to businesses of a certain size, or employees who perform a certain number of work hours in that jurisdiction. Check your state and local law for details.

Federal law requires employers to pay non-exempt employees 1.5 times their "regular rate of pay" for all hours worked over 40 in a workweek. Some states require overtime pay in additional circumstances and at different rates. An employee's regular rate of pay includes their hourly rate as well as the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. Review your pay practices to ensure that you are calculating and paying overtime in accordance with state and federal laws.

Do all of your "exempt" employees meet applicable federal and state salary and duties tests?

Federal law allows for exemptions from the overtime requirement for certain employees who work in administrative, professional and executive jobs (known as "exempt" employees). To be considered "exempt," these employees must generally satisfy three tests that are part of the salary and duties tests:

  • Salary-level test. Employees must receive a salary of at least $684 per week.
  • Salary-basis test. With very limited exceptions, the employer must pay employees their full salary in any week they perform work.
  • Duties test. The employee's primary duties must meet certain criteria.

Many states have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. In many cases, the state criteria are harder to meet than the federal criteria.

Before classifying and treating any employee as exempt from overtime, employers should confirm that the employee satisfies all applicable tests for overtime exemption under federal and state laws.

Do you address compensation in exit interviews and stay interviews?

If you receive notice from an employee that they're leaving, conduct an exit interview to find out why they resigned. Exit interviews can help you identify your company's weaknesses, so they can be addressed before the next employee leaves.

A growing number of employers are also conducting "stay interviews," asking their employees why they work for the company and what could cause them to leave. If you conduct such interviews, ask current employees questions that address both why they're loyal to the company (an indication of what you should keep doing) and why they may consider leaving (an indication of what changes may need to be made). These interviews typically include questions about what the employee likes most and least about their job, what the employer/supervisor can do to support them in the challenging aspects of their job, whether they believe their talents are being fully utilized, and what would make them consider leaving.


Review your compensation program regularly to ensure it is meeting your business needs and complies with applicable laws.

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