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Creating a Smart Compensation Package

Are you paying your employees what they're worth? Here's how to develop a pay plan that will help you attract top talent.

Competitive pay is the most recognizable part of a company's compensation and benefits package, and it's key in gaining and maintaining an advantage in the marketplace. Some of the first tools used to gain that advantage are market salary reports, which are used to determine the going market pay rate in similar companies and industries.

When trying to keep up with market salary reports and the going market rates, small to medium-size businesses are sometimes at a disadvantage. Why is that? For one thing, the uniqueness of job roles within smaller companies can make it difficult to compare job responsibilities in the market and obtain suitable salary comparison data. A company's degree of competitiveness and ability to pay what the market bears can be another challenge.

But the going market rate must be considered in an effort to achieve and maintain external equity. If you're a business owner concerned with retaining top talent, you must consider the compensation practices of other companies in your industry as a tool for reducing both turnover and recruiting costs. Especially in a business where employees believe they can receive better pay for performing the same work somewhere else, there's little incentive to stay with an employer; therefore, you must be concerned with external equity.

Factors within a company must also be taken into consideration when you're addressing compensation issues. Internal equity seeks to place the same value on jobs that are similar in nature, responsibility and requirements. Jobs requiring greater skills or more responsibility are seen as more valuable than lower-skilled jobs. But remember, how your employees view their compensation is just as important as the compensation package itself. The potential exists for pay programs to be misunderstood or characterized as unfair, subjective or downright unlawful. In some cases, there may be merit to those perceptions.

Overall, a good pay program should be SMART, meaning it should be

S = Strategically based. When designing a pay structure, you should look at your company's goals and take its future business direction into account, while rewarding and recognizing employee performance.

M = Market tough. You should also look at the market and monitor what the market is doing to regularly attract and retain the best.

A = Analyzed thoroughly. You must analyze not only the market but also the jobs your employees are doing, and the jobs your employees will be expected to do in the future to maintain that competitive edge.

R = Reward results. Reward results and recognize potential. Most employers want to give incentives to encourage employees toward an expected end rather than fully paying out dividends based solely on potential. Integrating rewards with recognition strategies allows you to encourage employees to exceed performance expectations.

T = Transformative. You don't want a compensation plan that's totally out of line with what the business environment looks like today--your plan should resemble the times. Therefore, your practices and reward elements should constantly change with the times.

In building your compensation program, remember that you objective is to create a compensation program that will:

  • Attract and retain top talent;
  • Motivate your employees to achieve and maintain high performance;
  • Ensure competitive and consistent pay practices;
  • Comply with applicable federal and state laws and regulations;
  • Operate within the constraints of your budget and financial resources;
  • Ensure administrative efficiency; and
  • Allow you to offer competitive salaries relative to the labor market.

Smartly integrated compensation plans take into account what's necessary for your company to maintain its competitive edge today and its sustained growth tomorrow. When compensation dollars are limited, including a good balance of benefits, recognitions and rewards can create a more appealing offering--and help you attract and retain top talent.


Mary Massad is the director of HR product development for Administaff, a leading personnel management company that serves as a full-service human resources department for thousands of small and medium-sized businesses throughout the United States. For additional HR information, visit HR PowerHouse, an HR website powered by Administaff.

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