How to Pay Your Employees Fairly

Have you ever wondered how to pay your employees fairly? I’m David Weaver, president of the Compensation & HR Group. I’m also an instructor at the Compensation Analyst Academy.

Internal Consistency

Typically, when you’re trying to pay your employees fairly you want to answer four questions. The first policy decision is around internal consistency, and in order to maintain that, you’ll want to start by analyzing your jobs. So job analysis is the first building block, and you want to analyze your jobs through talking with folks about what they do.

Start off with a questionnaire or an interview, and once you’ve captured the work that they do, document that in a job description. Then you will evaluate all of the positions in your organization and put a hierarchy together, and that’s the job structure. Once you’ve done those four pieces, you will have internal alignment within your organization.

External Competitiveness

Now let’s talk about the second piece, which is external competitiveness. You want to define your market. Defining your market really means, where do you gain people from, where do you recruit people from, and where do you lose people to? It could be an industry or a geographic location. Once you’ve defined that market, you will need to participate in some credible salary surveys within your industry or geographic location. After you’ve done that, you’re going to be putting together some policy lines and putting together a page structure, which is a series of salary ranges with a minimum, midpoint, and a maximum.

Employee Contributions

Now let’s talk about employee contributions within the organization. You want to be looking at people’s performance and their results and evaluating that information against the objectives stated in your performance management system. Those could be performance based. Some organizations also like to look at seniority, so that’s another basis for looking at performance.

Some organizations will also use things like merit guidelines to distribute their pay increases versus their results and where they’re paid and their salary ranges. You want to utilize incentive plans, like short-term incentive plans, long-term incentive plans, and bonus plans to reward people’s results for the objectives that they’ve achieved.

Pay System

You want to be able to administer your pay system using tools like salary planning, where you plan out where people are going to be paid over the next year, and salary budgeting. This is really looking at what’s going on in the external marketplace and deciding how much you’re willing to spend. Then you’ll want to communicate openly to employees how you’re taking care of your whole pay system.

Program Evaluation

Finally, you want to evaluate your entire program. Go back and look at each component and decide if it’s working for you. Once you’ve done all of these things, then you’ll have a sound compensation system and you can ensure that you’re paying your employees fairly.

Pay Philosophy

Once you’ve connected all these pieces of the puzzle, you’ll also want to articulate a pay philosophy. This is a statement of where you’re going to pay to the external market. So you’re either going to meet the market, lead the market, or lag the market. This will determine what your pay level is in the external marketplace. Most organizations will match the marketplace or they will try to have their salaries meet what their competitors are paying, and that’s the most common type of pay philosophy. You want to make sure that your pay philosophy is articulated so that employees know where you stand against the marketplace.