As we all know, employee compensation is key for attracting and retaining talent. LinkedIn’s Global Talent Trends 2022 report showed that in light of the pandemic, work-life balance has become a top priority for employees, but compensation and benefits is still a close second. Therefore, integrating compensation into existing People programs — in a way that allows it to work in parallel with other elements — is important at both the organizational level and as an employee expectation.
What Does Compensation Include?
When you think of compensation, salary probably comes to mind first, but a good salary alone isn’t enough. In addition to the monetary components of compensation — such as salary, bonuses, merit awards, commission, and equity — there are also non-monetary factors that make up employee total rewards. This can include things like health insurance, paid time off (PTO), training and development programs, corporate wellness programs, retirement plans, and flexible work options.
Total rewards can help companies offer a more well-rounded compensation and benefits package that aligns with what employees want. For example, in the past couple of years, work flexibility has become increasingly important, and a study by resume-builder and career resources website LiveCareer even showed that 29% of respondents would quit their current job if they were not allowed to continue to work remotely.
There are also generational differences. A recent Lattice survey of over 3,000 US and UK workers found that while base salary, health insurance, and bonuses are still the most popular forms of compensation, Gen Z workers also say stipends for things like broadband service and home office supplies are also essential. Total rewards can show employees that a company views and supports them as a person, not just a number on a balance sheet.
Why Is Compensation Important?
It’s no secret that compensation allows companies to differentiate themselves from, or at least stay on par with, competitors in attracting top talent. But compensation also helps retain talent, too. In Lattice’s 2021 State of People Strategy (SOPS) report, over half of surveyed HR leaders said compensation was the primary driver for voluntary turnover, with employees leaving for companies that offered higher pay. Similarly, a 2021 report from the Society for Human Resource Management (SHRM) showed that 53% of workers were looking for new jobs in order to obtain better compensation.
Losing employees is costly from a financial standpoint, especially when you factor in the time needed to hire, onboard, train, and ramp up a new employee. A 2019 Gallup article stated that a conservative estimated cost of replacing an individual employee can range from one-half to two times that employee’s annual salary. Not to mention, turnover can also have a negative impact on employee morale and organizational culture.
Beyond just dollars, compensation is also critical for People management. Employees want to be appropriately rewarded for their work (both in monetary and non-monetary ways), understand when and how they can receive bonuses and merit increases, and know that compensation is equitable across the company. Workers are letting organizations know what will make them happier at work — including regarding compensation — and happy employees tend to be more engaged, which benefits the organization as a whole. Engaged employees are more productive and can improve customer satisfaction, and they are also less likely to quit: A Deloitte study showed that organizations with engaged workers may have employees who are 87% less likely to leave.
Why Your Organization Should Have a Compensation Philosophy
While compensation is important for retaining employees, the past few years have shown that other benefits, like flexible work options, have also become essential. Due to workers’ changing expectations and priorities, it’s never been more important for organizations to have a compensation philosophy.
A compensation philosophy is essentially a playbook that establishes the guidelines of how an organization pays and rewards its employees, and it should be tied to company values. For example, if a company has identified diversity, equity, inclusion, and belonging (DEIB) as a priority, its compensation philosophy should be structured to ensure equitable salaries and raises across all groups, especially marginalized groups that have traditionally been paid less. It should also be reviewed regularly to reduce bias.
Compensation philosophies provide a holistic view of compensation, as they typically cover total rewards, salary structure, and raise models. They give People teams rules and principles to follow when creating compensation packages, which can provide transparency, promote fairness, and help achieve equity throughout the organization. Compensation philosophies are also helpful for communicating to and setting expectations for employees regarding how they can actively manage their own career development; by having established company-wide salary bands, raises, and bonuses, employees have a better understanding of how their performance will be rewarded, and by how much.
Once a compensation philosophy or strategy is created, the People team’s job isn’t done yet. Compensation philosophies should be revisited regularly and evolve over time in response to internal and external factors that impact the organization.
How to Incorporate Compensation into Your People Program
People programs help bring an organization’s People strategy to life. They provide a framework for People teams to align goals and work across the company, and empower employees to perform their best.
Even though compensation is important, it’s not the only factor that drives employee engagement and retention, and paying employees high salaries won’t counteract a toxic organizational culture or poorly defined goals. Likewise, even the most detailed compensation philosophy — if not tied into your mission, values, and overall People programs — will not be successful.
People programs have three main components: goal alignment, performance management, and employee engagement. It’s important to integrate compensation into People programs so that it complements, not conflicts with, these other components.
The 3 Main Components of People Programs
WIthout goals, an organization is just a collection of people doing disconnected jobs. Goals provide direction and alignment at all levels of the organization, and engage employees by connecting individual work to overarching company priorities. A 2018 Gallup study showed that employees whose managers involved them in goal-setting were 3.6 times more likely than other employees to be engaged. The previously mentioned Deloitte study also found that having supportive management and clear and transparent goals drives engagement for current and prospective employees alike.
There are various goal-setting frameworks, and two of the most common are SMART goals and OKRs (or objectives and key results). SMART goals are goals that are Specific, Measurable, Achievable, Relevant, and Time-bound. They can be used to track business-as-usual activities and help measure things like employee engagement or personal development goals.
OKRs, on the other hand, help create alignment between employees’ work and strategic priorities. With OKRs, you have a goal (the objective) as well as how you’re going to get there (the key results). By design, OKRs are aspirational, encourage innovation, and help drive a company forward.
Compensation will play a different role depending on what goal-setting framework you use. For instance, if you’re using OKRs, you may want to avoid directly tying key results to compensation because it could lead to unintended consequences: Objectives should be realistic but ambitious, and if an employee’s compensation is dependent on reaching a certain objective, they may end up setting easy goals they know they can achieve, instead of pushing themselves to set stretch goals that may benefit their team or the company, in order to guarantee their bonus.
2. Performance Management
Performance management involves using performance reviews, feedback, and one-on-ones to let employees know how they are doing, look back on past results, and plan for future growth. There are both pros and cons of linking performance to compensation. By linking performance to compensation, the prospect of additional money may be a motivator for people to work harder and be more productive. However, that can also lead to incentivizing the wrong things. For example, individuals may prioritize achieving their own performance targets over collaborating with colleagues or contributing to a positive company culture.
The decision to link performance and compensation will come down to company goals, and can vary from team to team. It may be appropriate to link the sales teams’ performance to compensation, for instance, as closing more deals has a positive impact on the bottom line. However, IT teams have less of a direct impact on revenue and therefore, in this case, it’s harder to tie compensation to performance metrics.
Regardless of how compensation is structured, there needs to be criteria that are clearly defined about how salary and merit increase decisions are made. These criteria then need to be communicated to employees as part of the performance review process so workers get feedback on what they’ve achieved and how they’re being rewarded for it, as well as learn what their opportunities for growth are and what they need to do to reach the next milestone.
The timing of reviews and compensation decisions is also important. You want to give employees the chance to create their Individual Development Plans (IDPs) and growth plans, as well as enough time to actually achieve the goals listed within them. For example, you can schedule performance reviews and compensation decisions in alternating quarters; that way, in the quarters when employees are doing reviews, they can spend time having discussions with their manager about growth and development, and in quarters with bonus and merit decisions, employees can focus on reflecting on their past performance and what led them to receive (or not receive) merit increases.
3. Employee Engagement Surveys
One way to measure how employees feel about compensation is to simply ask them via engagement and pulse surveys. Engagement surveys provide longer-term, more in-depth feedback on company culture, and are done at specific points in time throughout the year. Pulse surveys, on the other hand, provide a quick check-in on how employees are feeling at a given moment. They only include a handful of questions and should be used more frequently to create continuous engagement, as well as surface any potential concerns early on, before they become bigger problems.
Using both types of surveys can be a useful tool in understanding if employees are happy with their total rewards, and where there are opportunities for improvement. Especially during times of change or uncertainty, pulse surveys may help identify what aspects of compensation and benefits have become more important to employees than others.
A compensation philosophy is not a one-and-done proposition; People teams should revisit them periodically in response to changing company and economic conditions. After all, if you are asking employees to provide feedback, they want to know that their opinions are being heard — and see that positive changes are being made in response to their input. While you likely can’t make every single employee happy, you should be able to see recurring themes in the surveys that can help you narrow down your focus to the most impactful and important areas to take action on.
Compensation is a top motivator for employees, and it goes beyond just a base salary. Both monetary and non-monetary compensation contribute to employee total rewards, which can help drive employee engagement and retention in the long run. Although compensation is important, it’s not the only factor that helps keep employees engaged and happy, so it’s important not to only focus on compensation, as well as not to think of it in a silo. Instead, you should incorporate compensation as one component in your organization’s People programs, in a way that lets it work in tandem with goals and performance reviews.
Lattice takes a holistic approach in improving the employee experience, and our new Compensation tool is now a part of our comprehensive suite of People management tools. Request a demo today to learn how to connect performance and compensation to drive employee engagement and retention at your organization.