An HR Manager’s Guide to Doing a Compensation Analysis

Categories: Advice for HR Professionals
An HR Manager's Guide to Doing a Compensation Analysis banner

Employees are the ones who make your items, services, and products and regularly contact your customers or clients. They stand in for your worth and quality. Therefore, the HR department must ensure the pay and perks provided to its employees are competitive and desirable enough to maintain a good level of morale.

To achieve this, as well as maintain a conducive, healthy workforce and assure employees that the company values them and appreciates their work, HR managers must conduct compensation analysis. After all, a company’s most valuable asset is its people. 

As HR managers, you should know how to do compensation analysis. That consists of being proactive about researching and analyzing if compensation packages are still competitive and equitable for the employees. 

An HR Manager's Guide to Doing a Compensation Analysis infographic

What is Compensation Analysis?

Compensation analysis is the process of examining your employee’s pay in comparison to their colleagues or relative to other companies in the same industry. When your company has an excellent compensation structure, it increases your desirability in the job market, helping you attract and retain top talents in the industry.

HR managers should lead the charge in compensation analysis. Once they successfully analyze the compensation package offered to employees, companies will have a document from which hiring and pay adjustments will be based.  

How Should Compensation Package be Analyzed?

Assessing your organization’s compensation package entails comparing how it stands against different benchmarks. The most common methods of comparison are the following.

  • External Equity – This entails assessing compensation and procedures with external firms. It considers the salary that similar occupations on the larger external market receive. Apart from choosing companies in the same industry, you should also compare yourself to similarly-sized companies.
  • Internal Equity – In this method, the wage equity of employees working the same job in the same company is assessed. Its goal is to pay people fairly according to their amount of work. 
  • Per Region – This compares the salaries of employees performing similar jobs in a given area or region. Geographic pay differentials are necessary, especially if employees are located in different locations. Those in high-cost-of-living areas may find your compensation package inadequate, even though it is generally competitive for employees in low-cost-of-living areas.
  • Per Level – This compares an employee’s employees’ performance in relation to their pay. This is a great way to determine whether a particular employee is over- or underpaid.

How to Do Compensation Analysis

  1. Review your company’s compensation philosophy

A compensation philosophy is a formal statement outlining an organization’s position on employee compensation. It explains “why” an employee can only receive a specific amount or number of remuneration and helps with keeping the compensation consistent. Employers use this as a guideline when creating a compensation structure. 

Usually, the management team and HR department work together to design the compensation philosophy based on the company’s financial situation, vision, objectives, the job market, and other elements.

HR managers should periodically examine and revise the company’s philosophy in light of its condition. You should also consider if the compensation philosophy is reasonable, fair to employees, financially wise, legally compliant, and so on. 

  1. Determine which data sources you will use

Even with a formal pay structure, not all employees with the same job titles are paid equally. When conducting compensation analysis, you must have current, accurate, and valid data from 2–3 different sources, so you can cross-check whether they are accurate or not. These data sources are as follows.

  • Third-party traditional surveys These provide a wide range of data from survey businesses, the government, industry associations, and consulting firms. You will need to age the data and bring it up to date because it may take a year for third-party surveys to be published.
  • Crowdsourced data Some online resources provide crowdsourced employee salary information. These sources may offer current, convenient options for comparison. Just a friendly reminder that not all internet wage data sets are created equally. Make sure you know how thoroughly the data were vetted before release.
  • Custom surveys You can hire a third party to conduct a specific study if you’re having trouble finding coverage for your business’s particular jobs. Although they are pricey, these surveys are frequently highly accurate.
  1. Conduct a job analysis

Job analysis is used to decide where to position employees relative to the organization’s structure. It is done primarily via two processes.

  • Categorizing jobs into job families Job families are collections of occupations connected by shared vocations or professions. An employer decides if these jobs are to be grouped or have the same pay grade system. Some examples of job families include sales, finance, and engineering. They may also be divided depending on the employees’ locations or divisions.
  • Determining rank positions using job evaluation Job evaluation is about establishing the value of a position relative to other positions within the company or competitors. This makes sure that the entry and performance standards for different jobs vary.
  1. Do market research

By conducting market research, you can ensure that compensation is fair compared to other roles held in the market.

There are several important points when doing market research. Gather and look through the surveyed data carefully. Companies may have different job titles for the same position. To avoid confusion and mismatched information, read the job descriptions. 

You can also opt for employer-reported data from industry insiders and consultants when gathering market data because this is more reliable compared to employee-provided salary information. The same goes for free salary data from the internet, as they are usually only self-reported by employees. 

  1. Create job grades

Creating job grades is a great way to divide positions based on seniority or level within the company. This helps differentiate positions and systematize your compensation package for similar-leveled roles and responsibilities. There are two ways to create job grades: using market data to combine roles based on similar salary survey data or data from job evaluation to group positions into job grades.

  1. Plot the salary range for each position

The salary range refers to the maximum and minimum amount employers are willing to pay employees who perform a given job or function. The compensation range should be based on market pay rates derived through market pay surveys for individuals performing comparable work in comparable industries in the same geographical area.

Companies also establish pay rates and wage ranges that consider the training, expertise, knowledge, and experience required for each job. You should go through each position and compare them with your competitors to determine whether your offer is still competitive or not.

  1. Draft a comprehensive salary structure based on the salary range

Now that you have gone through each position in detail, you can now weave the disparate information together to create a comprehensive salary structure. The structure of incentives and other remuneration, like bonuses, can also be reviewed at this stage.

Having a comprehensive structure will help you systematize your compensation offerings moving forward. It avoids mismatched, unequal, and unfair pay structures that may arise when each position is analyzed separately.

  1. Allow for updating and aging

Like the external market and economic activity, compensation is also constantly evolving. The data you gather throughout compensation analysis has a limited shelf life. Therefore, you should update them every 2 or 3 years.

Aging is the process of raising pay grades in line with the market without having to spend money on brand-new wage survey data every year. There are some tools that you can use to do this. The Employment Cost Index (ECI) tracks changes in total compensation, including pay, perks paid by the employer, wages, and salaries.

  1. Communicate the final plan to employees and managers and implement

As you approach the final steps in compensation analysis, it is essential to ask for feedback from the compensation committee. Once your plan is approved, executive staff managers step in for any revisions and adjustments.

From here, it is a matter of disseminating the information to the company. This can be done through slideshows, printed material, and so on. You may think implementing the plan or program is the last step, but it also requires follow-ups such as employee surveys and KPI monitoring to ensure it works out well.

Making Your Way to the Top

Performing a compensation analysis can be a challenging task for HR managers. You must go through research, data gathering, and thorough examination. But when done correctly, it can contribute to your company’s growth. 

Compensation analysis is more than just studying and adjusting pay rates. It paves the way to attracting jobseekers, boosting your employees’ performance, and preserving your top talents. This practice helps keep you at the top of competitive industries and job markets. 

If you need help with HR and staff management, contact Manila Recruitment. They are one of the top recruitment agencies in the Philippines. With a big team of professionals, they develop solutions that will make your job easier and lead your company to innovation.