Question: Implementing compensation policy to reduce wage disparities

My partner and I have bought a 150 employee, well-performing service business. We notice that the wages for similar jobs even at junior associate level have huge pay disparities, caused due to

- some employees have spent over a decade in the organization in the same job. The annual increments have made them more expensive without an increase in responsibilities

- some departments have had a free run in making their offers to new employees without HR manager's involvement

This disparities are even higher at manager level. Consequently we are operating at a higher fixed cost as a % of revenue than our industry peers. How can we correct the situation?

5 Expert Insights

Let's start with the most important fact. The business is running well. The most important thing you can do is NOT change that fact.

There are several components to this question.

1) It sounds like everyone gets an annual increase. Each job should have an acceptable pay range. The ratio between the top of the range and the bottom (called the compa-ratio) should be defined and outliers should be rare.

So, first you need to define these ranges. If there are too many people outside the range you may need to create more granular job descriptions, or you may need to promote or demote people to get better alignment.

2) It sounds like the company does not have a formal compensation philosophy. A Comp Philosophy defines your approach to pay.

- Where, in your comparison to peers do you aim to pay your employees? (50th percentile? 75th percentile?)
- What compensation instruments (pay element) do you use? (Cash, Short-Term Incentives/Bonus, Long-Term Incentives, Equity, other forms of recognition, benefits, etc.)
- What percentage of total compensation or total rewards should generally be represented by each pay element? Should base pay make up 80% of pay with the rest assigned to Bonus?  This will and should differ depending on level of employee and job.

3) The company should have a hiring committee that previews offers. You may need to work into this slowly by reviewing offers that have been completed and having the review team come up with recommendations on how to avoid inconsistency in the future.

4) In short, this correction will take effort, buy-in and training. But it can, and should be, done.

There is a classic HBR article by Frederick Herzberg ( ) in which he describes a distinction between things that motivate employees and things that cause dissatisfaction. Guess what... salary is one of the dissatisfiers.  Although people certainly appreciate getting paid for their work, their salary does not cause them to jump out of bed in the morning, eager to get back to work. On the other hand, if there is a sense that a given salary is not fair, an unhappy employee is almost sure to follow.

Fairness, or justice, comes in three varieties:
1. I get my fair share
2. Share are not equal but I understand the rationale
3. Shares are not equal, and I intend to get even

Since any rationalization of your compensation policy would probably necessitate reductions in salary for some of your employees, or at least no increases until things evened out, there would seem to be some risk of generating unhappiness and/or anger, because any takeaway is perceived as a violation of "I get my fair share".  It may well be a great investment to have expert help from an objective third party, who could give you a basis for explaining the change, thereby achieving fairness via point #2. In any case, it will be important to be thoughtful in planning how to introduce a change such as this. Transparency, respect, and abundant two-way communication should help.

Interesting. I suggest a few things..

Certainly the fact that a hiring manager can make an offer without HR involvement is a big negative. There should be a mandate from senior management that HR must be involved, generate the offer, and that the hiring manager has budgetary approval - from management as well.

Regarding disparities... I would suggest that all jobs be reviewed, and reclassified with new and appropriate salary grade structures - each grade having a min, mid and max range annually. Importantly - all future increases must be tied to a new and formal performance review initiative.

This must be announced by senior management. Even though you are a small company, HR technology software is available to implement a fairly robust Performance and Succession Plan capability - even tied to open/closed requisitions processes - and tie it to your current HR and / or Payroll system.

Good luck.
Marc S Miller

In addition to the sound advice offered by others I suggest that you also do the following:

1. Once you have comparative compensation data from your geographical area and peer businesses, you will want to decide where to position yourself against the median salary range of comparable jobs.  Making this decision will require a balance of affordability and what will enable you to attract and retain the type of talent needed to sustain and grow the business

2. Design, introduce and train managers in a robust Performance Management process that includes SMART performance goals specific metrics for each goal, a performance progress tracking component, standardized definitions and criteria for each level of performance rating in your new system and, if you include behaviors as part of your Performance and Reward System each behavior has to be clearly defined and described with examples of what each level of behavioral performance looks like.

Once the Performance Management process is in place, plan on having someone responsible for reviewing, auditing and signing off on all performance reviews and reward recommendations, particularly in year one.

In companies of your size I would recommend that employee's manager drafts the review, his/her manager provides input and signs off. Then HR audits it for documentation, accuracy, fairness and clarity.

For at least the first year I would have the senior exec review and sign off on reviews and merit recommendations to demonstrate commitment and an expectation that managers will manage the process effectively.

Marc's answer is sound. Allow me to add just a couple of points.

The grade range structure should be built reflecting similar jobs in the industry and in the community. This information is usually easily gotten with some survey effort. Once the job is rated and fitted within the range, those outside the range need to be adjusted. Typically those below the minimum are brought into the range within a short period. Those above the maximum are usually "red circled" and kept without a change in compensation until the ranges increase (inflation, competitive & community movement) or the individual is promoted into a job that will permit an increase as long as the increase keeps the person within the range of the new position.  

Wage & salary administration is  a critical discipline to maintain your company's competitive position and to ensure a sense of fairness within the employee pool.

Hope the comments from everyone are helpful.
Gary Brooks