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Workforce Compensation: Navigating Salaries, Raises, and Employee Retention

Of all the choices CFOs make about how to spend money, some of the more difficult decisions involve their company’s most crucial, yet often most complicated, assets—employees. They face tough questions whenever they’re hiring, managing, and retaining top talent: Is an exceptional candidate exceptional enough to warrant an offer higher than you planned to make? Should you squeeze the budget to give everyone the annual raise they expect, or save the money and still hope to retain staff?  Are large bonuses mandatory for the high performers you don’t want to lose?

Compensation experts acknowledge that answers to questions like those may vary from one company to another, but one certainty is shared: Establishing policies and priorities in advance is key to effective employee compensation practices. “Too many organizations plan and administer their pay systems by default, or worse, fall back on ‘the squeaky wheel gets the grease’ practices,” writes Sharon Koss in Solving the Compensation Puzzle, a book published by the Society for Human Resource Management. By ignoring pay and performance systems, companies end up with “devastating” results, she adds, in the form of lost productivity, low morale, and time-consuming and expensive recruiting efforts. “Smart, successful organizations do regular planning and evaluating of their compensation and performance appraisal systems,” according to her book.

However, the best-laid plans can be a challenging goal when human capital is involved. Regis Quirin, director of finance at law firm Gibney Anthony & Flaherty LLP, who previously held a variety of consulting CFO positions, has seen the issue firsthand in debates with companies over the value of workers. “Everyone’s dispensable,” he says. “It’s a terrible concept, but it’s true. Department heads think people are wonderful, and they are. They think they’re fantastic, and they are fantastic. And they think they’re irreplaceable, and they’re not.”

Quirin says that philosophy influences the way he thinks about both hiring and raises. When it comes to filling an open position, he says, salaries should be pegged to the market, based on reviewing a few sources that collect salary data. Once an employee is on board, raises and bonuses should be based on performance.

The hard part comes next, as companies must navigate around what constitutes “good performance” amid their group of star performers, average performers, and those who are not worthy of a raise. Besides rewarding employees who do not deserve the recognition, continually giving raises of 5 percent or more across the board can dig the company into a hole over time if revenues start shrinking. Bonuses can be a better solution, Quirin says, but only if they’re tied to particular goals. “If, at the beginning of the year, you set the ground rules, employees understand that,” he says. “They really do.” On the other hand, if a company simply gives everyone $500 every year, eliminating such a perk will cause hard feelings.

Flexible vs. Rigid Pay Structures
Malak Kazan of ERI Economic Research Institute, which compiles compensation and salary surveys, isn’t as insistent as Quirin about setting a rigid salary structure for employees.  “At the end of the day, you’re trying to find the best person for the job,” she says. “It’s not dollars or cents.”

Beyond the money equation, “if you’re really hiring talent, you’re hiring someone who is going to learn and grow with the company and who’s smart and who’s going to help you build that institutional knowledge in your workforce,” Kazan says.

With many employers trying to do more with less, she adds, it can be tricky to figure out the right pay grade for a worker who can wear multiple hats. “Roles are no longer traditional,” she says.

But adjusting perceptions of how much to pay for a particular position can be a challenge for companies tied to their past pay practices. Jim Schwartz of Wabash Financial Strategies says he spent much of the past decade working for large companies that had very specific guidelines on compensation. “There’s not a whole lot of flexibility unless you’ve got very high-level performers,” he says.

Every year, he says, managers would rank employees and determine where they should fall within the range of permissible raises. For occasional superstars, the employers might make an exception and provide more frequent reviews. “We didn’t spend a lot of time worrying, ‘If we do X, will they stay,’” Schwartz says. “We simply looked at making sure they were treated equally.”

Another factor to consider in pay practices is how they are communicated internally. Schwartz favors openness in talking about corporate policies on raises and levels of pay for each position. “I believe in letting people know what opportunities exist,” he says. “They may decide it’s not worth their effort to work hard enough, in which case they ought to go somewhere else. If people expect a 15 percent salary increase in a year, and I can deliver only 5 percent, we’re going to have a problem.”

When it comes to filling open positions, Schwartz says, many companies don’t want to be too forthcoming about the salary range they have in mind, but he says providing as much information as possible can avoid wasting everyone’s time. And he says that while some employers worry about determining a candidate’s previous salary, that really shouldn’t matter much. “The argument for doing that is a company doesn’t want to overpay to hire somebody new,” he says. “In the end I think that kind of misses the point.” Instead, he adds, it’s best to know how much the person you want to hire will be “worth” in market terms.

Schwartz also believes focusing on raises and bonuses shouldn’t obscure nonfinancial ways of compensating workers, particularly for those that don’t want to switch positions. For competent team players who would prefer not to be supervisors or who have family responsibilities that limit their desire to climb the career ladder, something like a plaque of recognition or a dinner out can be a good way to reward a job well done. Kazan also notes the importance of non-salary compensation, from a strong health insurance plan to equity in the company to support for getting an MBA.

Even more broadly, Kazan says, the total “pie” of a compensation package could be said to include employees’ experience on the job. As an example, Kazan describes a nonprofit, for which she sits on the board, that has been able to pay people below market salaries but still manages to retain workers because of its respectful leadership, best practices, and innovation. “Different organizations slice that pie up differently,” she says. “I think companies underestimate what is everything that goes into that pie.”

Livia Gershon is a freelance writer in Nashua, N.H. 


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