Navigating Pay Practices: 5 Tips to Strategically Manage Compensation for Success

Money, money, money makes the world go around. – Cabaret

It often seems like a magic spell surrounds discussions about compensation practices. Yet, avoiding this topic can be a missed opportunity for leadership to enhance engagement, retention, and overall results. Acknowledging that most people primarily work for a salary is essential—we all have bills to pay.

For this edition of HR Practical Magic, I’ll focus exclusively on direct salary, not Total Compensation, which includes benefits and other compensation tools.

There is also no judgment or political commentary on wage issues here, especially about pay transparency. The aim is to empower those with the authority to manage compensation to do so intelligently.

5 Tips to Guide Compensation Strategies

1.??? Understand Perceptions of Pay

No one ever thinks they make enough money. Ok, maybe someone does, but I have yet to encounter it. For example, I've never had an employee decline a raise. “No thanks, Stacey. I’m good.” Honestly, I’ve felt the same about my own pay at times.

This issue can be cultural, reinforced by a "more is better" mindset. It can also occur when job responsibilities increase without a corresponding pay increase. Resentment can build, leading to sentiments like, "I’m not paid enough for this!" This dissatisfaction can result in employees mentally checking out; even if they don’t physically leave, they leave you mentally. #engagement #retention

2.??? The Reality of a Living Wage

?Struggling to meet basic needs with the offered compensation can lead to significant problems, from workplace safety risks due to fatigue to heightened stress impacting mental health.

While some companies are legally required to pay a living wage, failing to do so can lead to unintended consequences like high turnover, a stressful work environment, poorer product quality, and increased liability risks. It may not be required, but it is a strategic decision.

(To find the living wage in your county, visit the Massachusetts Institute of Technology's Living Wage Calculator at https://livingwage.mit.edu/ .)

3.??? Compensation Is Part Art, Part Science

Working in HR and finance reveals the complexities of pay structures. Salary bands and budgets may exist but can be arbitrary or overly broad. Consider the following when making a compensation offer:

?? Compare pay for similar roles in your industry and region: Consider the market standards and how your offer compares.

?? Consider how a candidate’s qualifications affect the offered compensation: Reflect on the candidate's expertise and experience and adjust the offer accordingly.

?? Evaluate how your total compensation package (salary, benefits, culture) compares to competitors: Analyze how attractive your overall package is in retaining and attracting talent compared to your industry rivals.

?? Consider current economic factors like inflation: Consider economic trends and their impact on salaries and compensation adjustments.

? Assess how urgently you need the candidate and the role filled: Determine the importance and urgency of the role, which may influence the compensation offered.

?? Ensure any offer can be justified to your CEO and CFO: Prepare to support your compensation proposal with solid rationale and alignment with organizational goals.

4.??? Regularly Review Compensation

Frequently reviewing the pay of both new and tenured employees is crucial for retention. Discovering that a newcomer earns significantly more can demoralize seasoned employees. Employees talk. Regular audits help minimize surprises and proactively address discrepancies, potentially avoiding retention issues and litigation.

5.??? Clarify How Performance and Compensation Correlate

Consider the Social Security Administration’s cost of living adjustment (COLA), which was 3.2% for 2024. Suppose social security recipients get a raise just for existing. In that case, it is plausible why an employee is not excited about a 3% increase at their annual performance review.

There are other options to tie performance and compensation. This could be a place for unconventional thinking. For example, why not align employee raises to the COLA standard first? This clarity can remove ambiguity and improve morale. Then, managers should be empowered to reward performance with bonuses, professional development opportunities, and more, which requires adequate leadership training and oversight.

Bonus Tip: Stay informed about compensation laws in your jurisdiction. As an HR executive, I’ve found it eye-opening how many regulations exist at the city level. I have also seen some ugly litigation surprise organizations for not knowing the local laws. “I did not know” is not a legal defense.

Strategically discussing compensation isn’t just about numbers; it’s about fostering a healthy, sustainable organization that retains top talent. Smart compensation practices are vital to achieving this goal and minimizing the negative impact on your budget and business results.

You've got this!