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Right Pay Motivates Employees

7/16/21 – Natalie Thompson

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Are you paying your employees too much or too little? How can you know? And, if your pay system is out of sync, what can you do about it?

Your turnover rate may give you an idea if your pay is not on a par with the market. High turnover can be an indication pay is too low. One way to find out is to do exit interviews and note employees' reasons for leaving.

Robert J. Sahl, a compensation consultant, recalled a case where no turnover indicated an employer was paying too much for a particular job class. Even when the employer put a freeze on pay increases, no one quit. "Why would they go anywhere else?" asked Sahl.

"Internal grumbling is another sign pay may be too low," noted Sahl.

If pay is too low in only a few individual cases, you could make up the shortfall immediately or over six to 18 months. However, if your pay is low overall, plan a strategy to get where you should be over a period of time and communicate your plan to employees.

“It’s important that the pay structure of an organization be viewed by its people as being fair,” said Sahl. For this to be the case, pay must be internally equitable and the compensation plan clearly communicated to employees. Communicate how pay is figured, the salary range, where the employee is in that range and how the employee can move higher in that range.

Demerits of Merit Play

Employees have come to view merit pay, like cost-of-living increases, as an entitlement (95 percent of employers said in one survey).

Obviously, employees are missing the point -- assuming the goal of merit increases is to promote higher job performance. Twenty-nine percent of employers surveyed admitted that their plans were doing little to encourage good employee performance.

Consulting firm Watson Wyatt Worldwide surveyed 694 employers about their compensation plans.

Their main findings:

1. Only one in three employers tied its reward plan strongly to its business strategy.

2. Organizations that did design their reward plan to support their business strategy posted stronger financial results than those that did not.

According to the survey, only 41 percent of employers actually boosted merit pay increases in a good financial year, but 49 percent reduced increases in a bad year. This downside bias helped explain why merit pay was not encouraging good performance.

How Do You Compare?

Pay must also be externally competitive to the marketplace, said Sahl. You can decide where you want to be and can afford to be -- at the median or at the 75th percentile, for example.

"To determine pay for a job, measure the 'size' of the job and compare that size job with market data," said Sahl. Avoid market pricing a job by simply looking up a title like "sales manager" in a survey to see what they're paid, warned Sahl. You may be looking at a figure for sales managers who handle $500-million in sales, while your sales are only $5-million, for example.

"Pay should be linked to performance," said Sahl. "It should be motivational – 'If I do this, then I will receive that,' " Sahl recommended against fixed- percentage, across-the-board increases.

"Also, don't use variable pay to make up for low base pay. The practice makes base pay irrelevant and eventually erodes the internal equity of pay in the organization," said Sahl. "Variable pay has to reflect variable performance."

"When organizations reach a certain size... say, 150 employees or $50 million in sales, they generally should be getting professional advice on compensation," said Sahl. "I see do-it-yourselfers buying too many surveys and using them incorrectly, with bad results. A professionally designed compensation plan could save you the cost of losing valuable employees over pay issues."

To determine if a compensation study or analysis is needed within your organization, please contact Natalie Thompson, VonLehman HR Consulting Specialist, at nthompson@vlcpa.com or 800.887.0437.