Compensation Analytics - Theoretical Background

Today, organizations that integrate compensation analytics into the decision making process generally have a balanced framework that reflects short-term and long-term planning needs. To support business planning cycles, organizations use compensation structures and labor cost estimates based on data from a single time period benchmark with a smaller sample size, as well as an analytics benchmark with a larger sample size that reflects data collected from thousands of available salary surveys, representing the movement of pay levels over time.

Compensation analytics has emerged as a new discipline built on the foundations of HR analytics that focuses on optimizing the cost of a workforce to drive bottom-line growth. This branch of analytics helps organizations craft an employer brand that effectively communicates a winning employee value proposition. A value proposition that includes both financial and non-financial rewards. In effect, compensation analytics enables HR leaders to reward high-performers adequately, to boost workplace morale, engagement, and retention.

ANALYTICS INFLUENCING COMPENSATION DECISIONS

Benchmarking Salaries

Hiring top talent is not easy, nor is it cheap. At a time when the balance of power has shifted from employers to candidates, it is highly likely that candidates are fielding multiple job offers at the same time, which makes negotiations and hiring increasingly complex. In this scenario, salary benchmarking via compensation analytics can help employers understand how the candidate compares to their peers and what the market is playing for a similar role.

Establishing Pay Equities

Pay equity is one of the most effective methods of eliminating gender and race discrimination when establishing and maintaining salaries. However, even today, organizations are struggling to close the pay gap. Deploying compensation analytics to understand pay variations among different racial groups, genders, and even age can initiate fair compensation practices. Compensation analytics also help you identify and address discrimination to ensure compliance.

Tracking Business Goals

Compensation analytics can help you understand if your total rewards program is achieving its intended goals. By analyzing trends in salaries, you will know if you are following your stated goals for compensation at your organization, and if those goals are aligned with your business goals.

Compensation analytics will help you understand the factors that determine the right pay, such as engagement levels, performance, manager effectiveness, recognition, career development, and even workload. Compensation analytics also unravels just how different an individual employee’s experience may be from their peers.

Compensation and Performance

There is no one size fits all compensation model. What an organization chooses to be HR policies would greatly depend on your company's unique situation, culture, performance objectives, planning horizon, the employees organization seeks to attract, and so on.

Compensation consists of the so-called fixed portion, also known as wage or salary, and variable portion, also known as performance-based pay. Salary and wages represent the market value of one skill set and are usually tied to the time worked, year, month, week, day or hour.

Performing Compensation Analyses

Following are the ways organizations can use data to perform compensation analyses:

Market Data Comparison

Using internal payroll data to compare market averages from external salary surveys.

Labor Cost Analysis

Merging payroll data such as base salaries, bonuses, overtime pay, and benefits to determine overhead costs.

People-count Analysis

Providing an accurate picture of staffing levels and compensation costs to assist with salary and workforce planning.

Compensation Models

Connecting compensation to performance is very tricky. It may motivate or demotivate the employees. Some go as far as suggesting that linking compensation to performance is self-defeating and demoralizing and hurts not just poor performers but also top performers.

On the other hand, some believe there is no alternative as to pay for performance, this is the only model.

At Netflix, it's a video streaming company known for its very strong performance-driven culture, high performers are paid top of the market compensation. That applies not just when they're hired. Their compensation is reviewed regularly to make sure it is still in line with the market value of any particular employee regardless of the job title. Mercer consultants call this model membership or efficiency wage. In this model, the organization keeps an above the market pay level and employees are motivated to perform in order to stay and grow within the organization.

Another model is tournament model where employees compete for career advancement, not for bonuses or other incentives within their current level.

Finally, there is a third model. Bonding, it puts an employee into a trajectory of planned pay increases from early to late in their career once performance is credibly demonstrated. Employees and their firm-specific knowledge are retained over the long period of time.

At the same time, there are strong proponents of traditional pay for performance model, although it may create an overly competitive environment in an organization if established improperly. But with no pay for performance at all you're at risk to demotivate high performers because of the people's, in their sense of equity. And equity almost never means equality and is almost always relative.

Some companies seek to strike balance between pay-for-performance model and nonequitable model where pay is not connected to performance. SAS Institute, for example, doesn't set individual goals for its sales people. Instead it uses team metrics. One of the problems with team metrics is, of course, the free rider dilemma. Many employees will try to shun their responsibilities in the expectation that someone else will do their work.

Compensation Models of the Future

Over the years, the go-tos for bonuses and compensation for a job well done have changed right along with the workforce. And compensation models must change as well. As the compensation structure changes, workers are requesting benefits from companies that add value to their lives. More importantly, workers are looking towards companies that are rich in opportunity, not just rich in stocks. What does the future hold for compensation models?

Incentivizing the Workforce

The workplace is changing and compensation has to catch up. In the years ahead, as organizations become more agile and flexible, compensation and reward structures will follow suit.

Employees want incentives more than compensation. The growing workforce is much more invested in motivation through other means like bonus plans that reward your hardest workers and flexible work hours.

Satisfied employees are not solely motivated by money. As employees grow out of traditional compensation, what is the next step? Clearly incentives. They promote a higher level of productivity in employees and deepen company culture. Employers have to discover flexible compensation plans that use incentives that are best for their company.

Short-term incentives reward drive, productivity and behaviors that have an impact on the company’s bottom line. Incentives also encourage teamwork and collaboration by weakening silos in addition to rewarding success.

Gamification and Validation

Incentives like gamification serve as that “good job” token. That notion is beginning to enter the workplace as gamification and social validation are on the rise. Contests and program incentives provide goal-attainment in a fun and relatable manner.

Organizations like the U.S. Army use gamification as a means of recruitment; others use gamification for training purposes.

It’s a Job Seeker’s Market

The tech field is dwindling. As the need for tech talent increases, so do the demands of the talent. They are not fighting for jobs; employers are fighting for them. Some companies have already changed their compensation models to address their tech talent needs so they can get ahead of the talent acquisition game. Tech talent looks for companies that are rich in culture-based incentives like sabbaticals and dog-friendly offices. Other companies are adjusting their recruiting methods to make space in the office and the budget for the right talent whenever they come aboard.

Benchmarking in Compensation Strategy

Compensation benchmarking is the process of using internal job descriptions to match to established salary survey jobs in order to identify the external market rate for each benchmark position.

Establishing market rates for core positions within an organization is important for a variety of reasons. First and foremost, it guides pay decision-making including hiring, promotions, internal equity salary adjustments, and general compensation budget planning. Because labor costs are the largest cost to any organization, a solid understanding of the external value of each position allows an organization to develop an approach for setting overall total rewards philosophy, or the level at which the organization will set salary levels. The ability to balance the needs to attracting and retaining talent with fiscal responsibility of the organization is a key priority for executives. Compensation benchmarking provides the information leaders need to define the costs associated with salaries and other compensation components such as profit sharing or bonuses.

It is very important to use a reputable salary survey to complete compensation benchmarking so that the matches made to the market are as accurate as possible. In addition, reputable salary survey companies employ compensation analytical professionals trained to compile, analyze, and publish data in a confidential and robust manner, ensuring a true representation of pay levels in the market. 

In-house Benchmarking vs Consultant

Compensation benchmarking can be done internally by HR professionals working with managers to ensure accurate job description content. There are also third-party compensation consultants who can provide compensation services to ensure all positions are documented and benchmarked with the external market accurately. When you work with a consulting firm, you reduce your costs of purchasing the salary surveys yourselves as most consulting firms already have a robust database of surveys and tools already. 

Sources of Compensation Benchmarking

The first step to compensation benchmarking and building up-to-date salary ranges is selecting your sources for current, market salary information. You want the data to be specific to your industry, geography and type of organization. And, your goal is to benchmark 75-80 percent of your positions so the data must also cover a variety of skill sets, experience levels and educational backgrounds. For data sources, you have three basic options:

Published, Traditional Surveys

These come from the government, associations or consulting firms and offer a broad perspective, though they may not be entirely up-to-date or match your organization’s structure, location or size.

Online Data and Software

There are now online resources that offer self-reported salary data from employees. These sources are very timely, easy-to-use and more cost effective than traditional sources.

Custom Surveys

Several firms are available to custom design a survey just for your business. These types of surveys are often very accurate and very expensive.