Compensation Strategy: Setting Rewarding AND Fair Rates

In our recent series on managing different kinds of workers – overachievers, under-performers, and everyone in between – we talked a lot about salaries. For one, we noted that it’s often appropriate to pay high performers more. That’s because top performers produce a disproportionate amount of the results for an organization (the top 5-8% of workers can produce over a quarter of the results for the organization).

At the same time, if other workers – particularly average staff – feel they’re being treated unfairly salary-wise, it can negatively affect their motivation, engagement, and loyalty. Indeed, with average annual pay raises hitting about 3%, salary raises are only just barely outpacing inflation. That kind of salary structure all but forces employees to look elsewhere if they want a significant pay raise.

So how do you ensure compensation remains rewarding but stays fair for all employees?

When setting salaries, do not confuse labor rates and labor costs.

Wharton management professor Adam Cobb says, “Organizations do everyone a disservice by ‘equating the two.’” Labor rates are how much the employee makes per hour, while labor costs incorporate productivity. Labor costs can be lower for an employee with a higher labor rate, if that employee is more productive. “The reality is, if you pay people more, they tend to work harder,” Cobb argues. The reverse happens as well: if the employee perceives themselves as being paid unfairly little, they are less likely to work as hard. Before cutting or freezing salaries, Cobb suggests organizations should focus on eliminating or minimizing constraints on productivity.

Be conscious of short-term decision-making.

Cobb also says that short-term decisions can have a big impact on the fairness of pay. Specifically, most organizations are reluctant to cut salaries of existing workers, so when there’s a good reason to cut costs – poor performance, or a market recession – new hires tend to be penalized with lower-than-average offers, to reduce outlays. Sometimes organizations have no choice but to make such decisions, but be aware that they can have longer-term implications for pay equity and productivity (higher labor costs despite lower labor rates).

Understand that reward systems include more than just salary.

The weekly, biweekly, or monthly paycheck is an important factor in that employee’s compensation, but it’s only one among many. Work can be rewarding in more ways than just money, and financial rewards can take more forms than just salary. It’s helpful to think about compensation in terms of the total package – and you should make sure you communicate that effectively to the employees.

Comply with fair labor laws.

Always comply. Numerous regulations affect payment and compensation, from the Fair Labor Standards Act to regulations that prohibit discrimination, like the Civil Rights Act, the Equal Pay Act, and more. Whatever you do, however you pay, make sure your compensation models are in line with the law.

Need more information on setting compensation or benefit strategies? CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with benefits, payroll, compliance, and HR administration. To learn more about our ability to create a strategic HR function in your business that drives business growth potential, contact us today.