Compensation Planning

By: Bob De Contreras

Why is salary planning important to my business success? People are the foundation to the building called your business.  Without quality people, your business can’t sustain itself and grow. How do you attract good people?  With a satisfying work environment, a quality benefits program, an appropriate compensation program and a high level of employee support to achieve their goals.  How do you get these employees to do good work?  With an incentive compensation plan. But, you need a plan so that you don’t offer too much or too little compensation. You need a plan so that you locate your business in a place where human resources are available or you need to at least know where to attract those quality workers.  Here are eight steps to appropriate compensation planning.

Get your internal/organizational structure right. As organizations grow, the original and often unspoken structure becomes less defined and the pay related to the jobs loses its internal rationale. You need to establish both internal and external rationale for your pay structure. Before you can do this properly, you need your organization structure to reflect your business needs and objectives.

Get job grades within that structure right. With the "outline" of your organization completed, look at each area within the company to see whether the internal relationships between the jobs are right. If not, you will probably need to undertake some form of job evaluation exercise to bring the two into alignment. This is a worthwhile step and may take a little time, but it will help immeasurably if you do this part properly. Once you have completed this, it is easy to use the results to create a number of grades within the organization. Creating job grades makes the management of pay and employee benefits so much easier. You need to create as few grades as you reasonably can, to ensure that you reduce grading disputes and to keep the management of the pay as simple as possible.

Tie pay to the job grades. Once you've created the job grades you can now attach pay to them. This is easier than it sounds. You need to take a range of "benchmark" jobs within each job grade and establish the typical market pay for each of them. By reviewing the pay levels for all these jobs within a job grade, you can start to create a pay range for that job grade. You need to be sure that the pay ranges are appropriate for the organization in terms of the number of grades (as noted above), their bandwidths and the overlap between them. These may differ depending in the level of the grade within the organization.

Establish the markets for each job or level. (These will differ depending on the levels.) When you are setting the right salary for a job, or the job grade, you need to establish the pay market for every job. Some jobs, typically at the junior level will be local and the local labor market will determine their pay, but there will always be jobs where the normal rules don't apply and you will need to think about the market pay for them. Executive-level salaries are normally set according to national or regional job market standards, management, technical and administrative level jobs are paid according to local, regional comparisons.

Ask: How do other companies of the same size compensate employees in these positions? How do other companies in your industry compensate them?

Creating job grades and pay ranges helps to make sure that your pay levels are appropriate for the level of the job within the organization. This will also help you to avoid falling foul of equal pay legislation.

Get the data right. What are people being paid elsewhere for the same work? Some people use advertisements in the newspaper to establish this information, but that's not necessarily the best way. Locate information from local salary surveys like the one from Capital Associated Industries (CAI) or on Web sites like Salary.com or SalariesReview.com.  Be careful about your data source because you will find significant disparity between data from different sources. Likewise, salary data varies significantly from city-to-city and region-to-region. The salary data from CAI is contained in a 400 page document with exceptional detail on salary bands and ranges by job position and by geographic area in North Carolina. The following charts from the CAI data show how salary data varies.

Figure 1: CAI salary data areas.

 Figure 2: CAI data on monthly pay by region by pay grade. Based on the National Position Evaluation Plan grading system.

 Figure 3: One comparison between CAI and Salary.com data showing variability of local data to national data. Programmer I is grade 8 and Programmer II is grade 9.

Salary increase planning. Once you've got the salary plan established it’s time to think about salary increases. Your planning for salary increases is also based on the data you gather from your salary data source of choice.  Again, you should look to local data like that available from CAI. Using history data and data on specific job positions, you can tune-in to the right salary increase plan (not too much, not too little).

Figure 4: CAI data on North Carolina’s average salary increases by job level and compared to the consumer price index.

The Add-ons. When you've created the job grades and pay ranges you can add the "fancy things" like performance pay, benefits packages and so on.

In this way, you are not creating compensation in a vacuum, and you are not simply "following the crowd" with your compensation structure. Rather, your system is well thought-out.

Figure 5: CAI data on how North Carolina companies are using incentive pay in two general job categories.

Remember to compensate your "key" people adequately. These may be your top managers, but they could also be your most solid workers. Their tenure and knowledge may make them pivotal. Likewise, fair reward for the rest will ensure that the bulk of your workforce stays focused on their jobs, not on how unhappy they are with their pay.

To contact CAI:             Capital Associated Industries

                                    2900 Highwoods Blvd.,

                                    Raleigh, NC 27604

                                    p: 919-878-9222  

                                    f: 919-872-6599

                                    www.capital.org

                                    info@capital.org

Compensation Planning

By: Bob De Contreras

The CEO said, “I’m billing 5 million dollars a year and my profit is only 180 thousand.  What’s wrong with my financials?  Why am I not making more money?”

 We talked, asked a few questions, looked at the financials, reviewed the organizational structure, and we saw several areas of the business that needed a tune-up.  One that stood out was a combination organizational/financial problem.  This CEO had a VP of Finance ($150,000 per year), a VP of Sales ($125,000 per year), a VP of Marketing ($125,000 per year), a VP of Product Development ($110,000 per year), and a VP of Human Resources ($100,000 per year).  Looking at the sales staff we found 3 sales representatives earning an average of $80,000 per year salary.  When we compared the local, average salary for these positions with what this CEO was paying, we saw a difference:

* Based on the Salary Survey available from Capital Associated Industries.

 As hard as it may seem to believe, this CEO was overpaying his key management and staff by an amount greater than his current profits.  That is, over paying compared to the local average salaries for these positions. 

 We asked how he came to decide on the salaries.  He said that he wanted to have better than the average employees so that he could have better than the average products and services for his customers.  That led to the decision to pay better than the average salaries. 

 We asked what data he used to decide on what salaries he would pay and he said that he used a couple of sources – one from the state and one national survey.  We discussed how he had probably made a couple of mistakes.  He didn’t use local salary data and he set the salaries too far over the average. 

 So, we suggested some changes, planning, and restructuring:

 Get your internal/organizational structure right.

For an organization of his size he needed to consider if he could really afford a sales manager or if the sales manager was required, that he could not afford three sales representatives.  Likewise, we suggested that he consider a comptroller rather than the expensive VP of Finance.

 Get job grades within that structure right.

Part of his overstatement of salary for each position was also based on the fact that this CEO had not considered salary ranges for each of the job positions.  Salary bands and job grades were the next step for this CEO to review.

 Tie pay to the job grades.

The next step was to tie the new pay ranges to the new job grades.  This allowed more range for salary increases and an effective reduction in salary dollars.

 Establish the markets for each job or level and get the data right.

We reviewed the average salary ranges for the different positions and in the different cities in the state.  This review also showed that employees were being over paid based on the average salaries for each job title in the cities where he had employees.

 The Add-ons.

This CEO didn’t have an incentive compensation plan except for the sales staff’s commission plan.  We worked with him to consider various bonus and commission programs for all the key managers and sales staff.  These plans were based on margin attainment not revenue attainment.  Sales commissions were raised and salaries lowered.

 It took a year to get the salaries realigned and to get the incentive compensation plans in place, but in the end this businessman was able to significantly improve profitability by bringing his salaries into alignment with average salaries in the cities where he had employees.  These steps are explained and documented in more detail in the main article of this news letter.

Brought to you by:                                                         [BACK]

            Bob De Contreras                                                  
            Rich Kramarik