While benefits, career paths, cultural fit, time off and work-life balance still matter, salary remains one of the most important factors in recruitment and retention. In fact, two-thirds of the respondents in Workforce 2020, an Oxford Economics and SAP SE study, said compensation matters most.
Each position in an organization has its own set of responsibilities necessary to meet the overall goals set forth in the organization’s strategic plan. The skill set, experience and qualifications of the person filling a position can determine how successfully that plan is carried out. Identifying pay ranges for a position can aid management with determining if they are paying appropriately for the job responsibilities being performed, while taking in to account factors such as the industry, size and geographic location of the organization.
Compensation is just one item to consider in a successful recruitment strategy.
VARIATION IN PAY RANGES
Variation in pay ranges may be based on years of experience, professional credentials or longevity in the same role. To be effective, for the position listed, pay ranges should show both base and total compensation for the 25th, 50th and 75th percentiles with total compensation being inclusive of what is considered “bonus comp.”
There are a variety of reasons why an employer would consider paying above the 50th percentile. They include:
Conversely, there are a variety of reasons why an employer would consider paying below the 50th percentile. They include:
BONUS COMP AND INCENTIVE PLANS
Key employees in an organization (those whose position can substantially affect performance outcomes) often receive a large portion of their compensation from incentive plans. Incentive plans are formula-driven awards based on the employee’s contributions to the organization’s performance, which can be set up as either short or long-term programs.
Short-Term Incentive Plans
Short-term incentives tend to cover a period of up to one year and hold individuals accountable for outcomes which they have the ability to impact or control. The at-risk nature of the short-term incentive provides motivation for the employee to perform well or lose out.
Examples of why an organization may use short-term incentives include:
Long-Term Incentive Plans
Long-term incentives are inducements to influence longer-term results (those greater than 1 year). This practice is common in private companies that use cash to incentivize employees to perform their best to achieve longer-term results.
Examples of why an organization may use long-term incentives include:
Executive benefits are established specifically for key producers (executives) in an organization. It is a means of building and protecting wealth for the individual, and it helps the organization secure a competitive advantage in attracting and retaining premier talent.
Examples of executive benefits include:
Incentive Pay Generalities
A strong executive compensation package will include a mix of base compensation, short-term incentive pay and long-term incentive pay. When establishing incentive pay, it is important to identify performance levels and the amount of compensation tied to the performance level as follows:
Incentive pay is directly linked to the individual performance of the executive as well as the financial and strategic performance of the organization. For this reason, executive pay is meant to fluctuate from year-to-year. The incentive portion of total compensation is structured as a leveraged vehicle with the ability to zero out if organization or individual performance is below threshold levels or pay out significantly in a banner year.
THE IMPORTANCE OF REVIEWING YOUR COMPENSATION PLAN
Many compensation plans fall short of their impact potential because they are introduced then forgotten. To be effective, a compensation plan needs to be reviewed and modified as necessary to meet current organizational needs.
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