The second part of our series (read part one here) about evaluating your pay means looking at the big picture. It is rare that a company picks a pay rate out of thin air. There are a number of factors to consider in creating a pay philosophy.

The discussion of competitive pay belongs in top leadership forums and sometimes is put aside or regulated to Human Resources to do on their own. That is a big mistake. Let me tell you why.

It all starts with the business strategy; senior leaders readily embrace this initiative. When a strategy is developed, the management team creates a vision for where they see the business going in the next five to ten years. A clear vision gives the organization context for goal setting. It is then up to each department to set a strategy on what their contribution is to meet the plan.

It is time to look at the Human Resources strategy. A good strategy includes a plan on talent acquisition and management. It identifies the skills, knowledge and abilities an organization needs to attract, retain and motivate (also known as ARM) human capital to meet the business goals.

Under the Human Resources strategy, there is a compensation strategy providing a framework for key decisions about how people are paid. This strategy is one element of the overall Human Resources plan that focuses on meeting the talent objectives or ARM.

A well thought out compensation strategy requires additional input from the business strategy team (see, we do need them!). Without this information, poor decisions can be made on plan design and may hinder or derail meeting talent objectives. Some key areas to discuss and agree upon include:

  • Business Life Cycle – at what stage is the company in the life cycle. There are different plan designs for start-ups, high growth, mature, declining and companies going through rejuvenation.
  • Competitor Analysis – what kind of competition do we have and do we have the talent we to be successful?
  • Current capability analysis – do we have sufficient skills in house to get the job done?
  • Influence of economic environment – what are the current external pressures and what do we need to react to – now or in the future?
  • Other factors – do we anticipate third party, outsourcing initiatives or other unforeseen events to affect our business or people?

Once a management team defines the current state of these factors, they have the two pieces of information needed to perform a gap analysis: the long-term human resources strategy and the assessment of current capabilities.

The difference between these two factors represents the gap or shortfall. The challenge is developing a plan that closes the gap and meets ARM objectives cost effectively.

The decisions a company makes on salaries or pay structures can close or increase the gap. When a company makes a poor decision, the unintended consequences may be difficult to turn around quickly. Let us consider a couple of situations.

Companies in a high growth cycle require more talent to maintain the momentum of meeting business demands. Sourcing talented people can be very competitive even in less desirable economic situations.

Let us consider a company in a niche market and fast growing industry. It is likely that demand for the niche skills is high, yet scarce – driving up salaries. The decision not to pay competitively could severely limit the company’s talent acquisition plans.

Conversely, in a start-up or declining market, the salaries of employees may not be as lucrative, for very different reasons.

Start-up businesses begin with lower starting pay scales; intending to increase compensation with business growth. Despite the low starting pay, they can offer long-term security and growth for employees who are loyal in the beginning. Are they able to communicate that benefit effectively to get the talent they need?

In the situation of a declining market, salaries start out high, but there are pressures to make salary concessions, often to avoid layoffs. Ultimately, this puts the employee into survivor mode with severe morale problems. Key talent leaves the organization because they can find jobs elsewhere. The company gets better control on salary expenses, but at a price.

What can management do? They can look at their compensation strategy proactively by revisiting the factors every couple of years to ensure the assumptions are still correct. If there are significant differences in the business outlook or strategy begin to make subtle changes to the compensation plans to maintain good alignment.

What should you do as the employee or as a potential new employee?

Engage your boss or management in discussion around the factors presented in this article. The more you understand the business, the better position you will be to evaluate if your pay is appropriate.

If you are interviewing for a position in a company, do some research before meeting with them. Ask them the questions; see what they have to say. It may give you some clues about if they are a good fit for you.

In our next article, we will discuss how pay structures evolve from having good external benchmark data and a well-defined compensation strategy.