Several market and internal reasons cause salary discrepancies in an organisation
Year on year, organizations follow an elaborate process to award salary increases – in what they consider to be a fair and structured process. However, the question that invariably remains in people’s minds is: Why is the other person being paid more than I am – we’re doing the same kind of job? It’s a question of internal equity – or indeed disparity – of pay. One, that continuously haunts business leaders as well.
Let’s not kid ourselves. No matter how much we insist that compensation is personal and confidential, it never is! Everyone knows what everyone else is earning – live with it! And, compensation inequity is a silent killer. Festering in an employee’s mind from the minute she finds out about it!
Compensation disparity could be attributed to several factors including:
- Varying market drivers: At the entry-level itself, campus hiring is a classic example of a varying market driver. Partly influenced by rising cost of living, and partly by the snob value of the campus itself, but that’s a different discussion!
- Sudden spurt of hiring: Implementing an aggressive growth strategy or even an important project. Talent acquirers sometimes tend to over-pitch compensation to speed up candidate acceptance.
- Hiring for unique skills: Picking up individuals who possess specific, even rare, skills vital to fulfill a business requirement.
Many of these short-term ‘strategies’, however, result in imbalances across the compensation structure. Business leaders know about it, HR leaders know about it and employees state it often enough. However, the extent, and the exact locations, of these imbalances needs more than guesswork, and quick-fix salary adjustments. It takes a little time, effort, and some investments.
Of course, there’s no magic wand or single-point action plan, and certainly no short cuts, since conditions vary from organization to organization. However, here are some ideas that could be considered:
- Compensation Philosophy: A good compensation philosophy determines where an organization would like to be vis-à-vis its peer group – companies they hire talent from or lose talent to. Depending on where an organization is in its evolution, leaders can decide where they would like to peg compensation levels. Typically, organizations that are new or in a rapid growth mode often have a compensation philosophy of being significantly higher than the 50th percentile of their market. Bigger brands tend to be at the 50th percentile or just above it, because their overall employer branding is attractive enough!
- Market Benchmarking: Benchmarking provides factual data to determine which employee groups need a salary adjustment and approximately how much it would cost. Benchmarking is a tool that can proactively answer employee, and management, questions before they get asked with that tone of annoyance.
- Job Evaluation: All managers are not equal! Jobs at the same managerial ‘level’, or compensation band may not necessarily be of the same size. Using a respected job-evaluation protocol determines the size of unique roles – irrespective of which business line they are in. Evaluating jobs may seem like an expensive and intrusive process initially, however, the exercise more than pays for itself in compensation savings. Accurately sizing jobs is fundamental to the success of any benchmarking analysis.
- Internal Equity Analyses: Ideally, should be done every three years to determine if individuals doing the same sized jobs are being paid equally – give or take 20% of the mean. Internal equity scatter-grams throw up outliers – those who are underpaid, as well as those who are overpaid. Areas where employee dissent is already festering!
Armed with solid data from benchmarking business leaders can make timely and fact-based decisions to fix pay disparities – fair and square:
- Performance is fundamental: Irrespective of the extent of pay disparity between employees, or employee groups, salary adjustments should always consider performance first. Low performers should not be considered just because they belong to a group that is below the benchmark!
- Focus on business-critical roles: Compensation investments should first focus on business critical roles. Roles vital to run the business and which require special skills, expertise or qualifications.
- Differentiated increases for high performers: Companies may create a differentiated merit increase structure exclusively for those who perform at levels significantly higher than everyone else. This elite compensation club would also act as an inspiration to help average performers turn the corner. Performance data will determine the point where the standard compensation ends and the elite club begins.
- Focused corrections: Pay corrections need be made only for a small group/groups of employees, not across the organization, thereby saving money. This approach identifies exactly where the imbalance lies and targets it with a specific correction.
- One-time payments: Can be budgeted for, independent of the merit increase cycle – if push came to shove. For example to individuals whose good work may only deliver results in the appraisal year. One-time payments do not impact salary levels, but act as a token of appreciation for good work.
- Managing the outliers: People who are being paid far higher or far lower than the mean for jobs of the same size. While plus/minus 20% of the mean is considered the ‘zone of tolerance’, anything outside of this increases risk.
o Above the zone of tolerance: These individuals are obviously costing the company too much – unless there is a logical reason, like demonstrating a rare skill! Up-skilling can help them take on roles that are commensurate with their compensation. Meanwhile, their merit increases should be kept deliberately lower than those with similar performance ratings.
o Below the zone of tolerance: The (quiet) unhappy ones who are delivering more than they are getting paid for! A quick decision can raise their compensation levels closer to the mean. Performance (and budget)-permitting, a single salary increase, or several half-yearly increases can bring low-paid employees to ‘at-market’ levels quickly.
CEO’s expect their HR leaders to be aware of the compensation scenario in the organization. They rely on them to also provide fact-based, data-supported recommendations to bridge these compensation gaps – proactively and early. Post-facto could be too little, too late, and when the best talent would’ve already been lost.