Managing salaries is the most basic function in compensation management, but salary planning can be complex in large and dynamic organizations. Yet it’s important to get it right because salaries must be competitive in each market to attract talent while being internally and externally fair. And, as a large fixed cost, salaries are a major budget expense item.
With so much on the line—getting salaries right, controlling costs, and meeting deadlines—technology can streamline the process and help you optimize your compensation spend.Managing salaries starts with planning. If the employee base remained static, it might be a simple task, but that is never the case. Employees come and go, get promoted, change roles, or move to new geographies. The process of staff cost and headcount planning can become involved as staffing levels and employee pay rates change during the year.
Benchmarking to ensure competitive pay
Your salary structure is key to attracting new talent and keeping existing employees happy. How do you know if you are offering competitive pay for your industry, and keeping up with current reward practices? You can address this by benchmarking your pay structure to the market for your industry, jobs, and geographies. There are numerous providers of salary surveys, such as Aon, Culpepper, Willis Towers Watson, etc. Depending on the markets in which you operate, you may need data from multiple providers to cover them all, or to get a composite view.
The trick then is aggregating the data, cleaning it, and mapping it to your job codes, and generating a market median, then calculating the “compa-ratio” (employee salary divided by the market median) for each job code. Ideally, your compensation management software should handle that processing, since spreadsheets can be extremely cumbersome and error prone.
The value of benchmarking is that it can identify employees that might be at risk of attrition due to under-market pay, and can help you set a pay scale that will attract the talent you need in each of your operating markets.
Analysis to ensure fair pay
Along with having a pay scale that is competitive in your market, it is increasingly important to pay employees equitably within your organization, free from bias related to factors like gender and race. By removing these discrepancies and reinforcing pay equity practices, you will also be able to burnish your employer brand, establish a merit-based culture, motivate and retain talented employees, ensure regulatory compliance, and prevent discrimination lawsuits. It may sound too good to be true, but it's not—it just takes work and the right tools.
The secret to fair pay is data and the ability to analyze it at scale. The best pay equity strategies use tools that can gather, combine, and process all aspects of employee data, then apply business rules and AI/machine learning to identify current inequities and learn which attributes will lead to pay gaps over time. This can root out unconscious bias that may not be visible with standard analysis methods, and thereby ensure pay equity in your organization.
Controlling costs with modeling and simulations
To plan salaries, you need to start from the existing salary base and project forward based on an estimation of future staffing levels, merit increases, and promotions. Successful salary planning requires running simulations of different scenarios to see which one best supports your talent strategy while staying within budget guidelines. These capabilities become even more important when there are actual or planned mergers and acquisitions.
Key system capabilities
To get the most out of your salary planning, here are some of the capabilities to look for in your compensation technology:
- Integration of benchmarking data to generate compa-ratios and flag market pay gaps
- Ability to centralize employee demographic and pay data into one universe for analysis
- Rules engine and analytics that can detect, predict, and prevent manager bias in pay decisions
- Modeling and what-if simulation to create budgets and forecasts for headcount and staffing costs
Salaries make up a huge fixed cost and factor heavily into employee satisfaction and the ability to attract new talent, so it’s an important balancing act to be able to motivate your workforce while managing costs. The right compensation management technology can support you in devising a salary plan that is competitive, fair, and effective.
If any terms in this article are unfamiliar to you, don’t worry. We have a resource that will help you navigate this and other compensation management terminology. Bookmark our Compensation Glossary or download a copy to access it offline—it’s free!