HR Toolkit


Compensation & Benefits

Compensation Systems: Design and Goals

The design process is started by identifying desired outcomes and goals for your organization. This is often referred to as developing your compensation philosophy. Your philosophy is formed by considering a number of factors. The balance of direct and indirect rewards, the complexity and responsibility of a role and the candidate or employee filling it, as well as your focus on internal versus external equity are just few factors explored in this section. It is the ability to achieve results that is critical to organizational success.


Compensation defined

Compensation can be defined as all of the rewards earned by employees in return for their labour. This includes:

  • Direct financial compensation consisting of pay received in the form of wages, salaries, bonuses and commissions provided at regular and consistent intervals
  • Indirect financial compensation including all financial rewards that are not included in direct compensation and can be understood to form part of the social contract between the employer and employee such as benefits, leaves, retirement plans, education, and employee services
  • Non-financial compensation referring to topics such as career development and advancement opportunities, opportunities for recognition, as well as work environment and conditions

In determining effective rewards, however, the uniqueness of each employee must also be considered. People have different needs or reasons for working. The most appropriate compensation will meet these individual needs. To a large degree, adequate or fair compensation is in the mind of the employee.

Good Practice

A good compensation strategy includes a balance between internal equity and external competitiveness. Compensation and benefits affect the productivity and happiness of employees, as well as the ability of your organization to effectively realize its objectives. It is to your advantage to ensure that your employees are creatively compensated and knowledgeable of their benefits.

Good Practice



Equity

Equity or fairness has been mentioned as a key component in creating a successful compensation system. It can be defined in the following three ways:

  • Workplace equity refers to the perception that all employees in an organization are being treated fairly
  • External pay equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations
  • Internal pay equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization

Perceived inequity or unfairness, either external or internal, can result in low morale and loss of organizational effectiveness. For example, if employees feel they are being compensated unfairly, they may restrict their efforts or leave the organization, damaging the organization’s overall performance.

Internal equity

“Internal equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization”.

Another way of stating this is to say that a person’s perception of their responsibilities, rewards and work conditions is seen as fair or equitable when compared with those of other employees in similar positions in the same organization. Factors such as skill level, the effort and the responsibility of the role, as well as working conditions are considered.

An internal equity study can determine if there is pay equity between like-positions and if all roles in the organization are governed by the same compensation guidelines. Usually each role is assigned a pay range with corresponding criteria that outlines how to determine where an employee should be placed in the range.

Example

An agency may employ a number of social workers to work with similar client groups. By reviewing the salary of each employee and comparing it with others in the same role, you will be able to determine if internal equity exists. This does not mean that all employees are paid the same; it means that they are paid fairly in relation to other staff in the same role. Differences in salary may be based on education, experience, years of service, or responsibility level.

 

External equity

“External equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations”.

External equity exists when an organization's pay rates are at least equal to the average rates in the organization’s market or sector. Employers want to ensure that they are able to pay what is necessary to find, keep and motivate an adequate number of qualified employees. Creating a compensation structure that starts with competitive base pay is critical.

Employees also compare their roles and pay to roles and pay in other organizations. Unfortunately they do not always compare with similar types of organizations or even in the same sector. Generally, employees consider much more than base pay in determining external equity. For some more emphasis may be placed on employee benefits, job security, physical work environment or the opportunity for advancement in deciding if external equity exists.

The use of salary surveys is critical in your ability to determine if your compensation and benefits are comparable to similar roles in other organizations. It is important to ensure that the key responsibilities and goals of the roles being compared are similar; as is the sector the organization is aligned with.

Good Practice

A number of nonprofit organizations have tried to address quality of life concerns by only requiring full-time employees to work a 35-hour week, while many other organizations require their employees to work 37.5 or even 40 hours per week.

 

  • It is important that if the base pay for a specific role from group one was to be compared to the same role in group two, that the difference in hours is understood and accounted for.
  • While the difference in hours may seem small, if a person who worked a 37.5 hour week made $40,000/year, they would be making $20.51/hour. If the person working the 35-hour week were also being paid $20.51/hour, their annual salary would only be $37,328 per year. This could seem inequitable unless the difference in hours was clear.



Organizational strategy

There are a number of components that need to be addressed when developing your compensation systems to ensure they align with your organizational strategy and objectives. One key to remember is that your compensation strategy must help to create the work culture you want. How you structure your systems and manage the internal and external equity issues, will directly inform the culture of your organization.

Develop a compensation philosophy

A compensation philosophy is developed to guide the design and complexity of your compensation programs; this is done by identifying your goals and objectives, considering your competitiveness in attracting and retaining employees, your emphasis on internal and/or external equity, and whether performance is tied to increases. Understanding what balance you want to achieve between direct salary and indirect benefit is critical in developing your overall total compensation approach. A consistent philosophy provides a strong foundation for both the organization and the employee. Without a philosophy, leaders often find themselves unsure of what to offer as a starting salary for a new employee. This can lead to offering too high a total compensation package for a new employee in relation to existing employees, or being unable to successfully hire because the total compensation offer is too low to be competitive.

Your philosophy should be consistent with the size of your organization. If you have a small to mid-size employee base, keep your strategy simple and easy to administer. Ensuring your compensation guidelines are clearly communicated and consistently administered is a key to success.

 

Components

Once you have developed the over-arching philosophy aligned with your strategic plan and organizational culture, it is important that you determine if any differences should exist in pay structures for management, professionals, or front-line staff.

  • Objectives: What do you want your compensation program to do to help your organization succeed?
      • Be considered an employer of choice in your type of organization?
      • Have a greater emphasis on generous benefits versus top salaries?
      • Do you want to tie compensation to performance? Why, why not?
      • Offer great flexibility in work hours, shifts, and education support?
  • Market competitiveness: Will you compare your compensation components against the market in which you function or against other internal roles?
      • Does your organization strive to pay at market, above or below market?
      • Do you want to have your salaries above average, average or below average? Will your benefits/incentives balance for salaries?
      • What do you want to offer to distinguish you from others in your sector?
      • How do you want to be viewed by your stakeholders?
      • How generous should your benefit program be compared to cash compensation?
  • Components: What will be the components of your compensation program?
      • Do some earn hourly wages and others salary? Why, why not?
      • Are hours of work different for one group over another? Why, why not?
      • Is their ability to earn: flex time, lieu time, over time, different for one group over another? Why, why not?
        • Flex time refers to time that an employee has earned by working a longer week than required. Example: an employee is required to work 37.5 hours per week and chooses to work 40 hours per week instead. After 3 weeks, they have earned 7.5 hours of “flex time”. This often is the structure behind a person getting every third Friday off. Compressed workweeks are often used to offer employees reduced hours during the summer months.
        • Overtime is time that a person works in excess of their scheduled and required time. For hourly paid staff, this may be paid out to them at 1.5 times their normal salary. For management staff, an overtime agreement is usually in place that identifies that salaried employees do not receive pay for their overtime hours, but “lieu time” calculated at a straight hour for hour basis.
        • Lieu time is time that an employee earns by working in excess of their scheduled hours due to the demands of the job/day/situation. Lieu time is typically calculated as hour for hour. Example: an employee is required to work an extra 2 hours to complete an urgent project. They accumulate 2 hours of “lieu” time to be taken off work with pay at a time negotiated with their immediate supervisor.
    • How will employees receive increases?
    • How often will the role be evaluated against the established comparative group(s)? See the section on Salary Surveys for additional information on comparative groups
    • Will you develop a salary scale and criteria to advance; what place do qualifications and academic accreditation play?



Legal compliance

Compensation systems must be consistent with the existing legislation in the areas of Labour Standards, equal pay, Human Rights, Employment Insurance, pension or retirement benefits, labour relations and Occupational Health and Safety. Regularly reviewing the HR Toolkit, key government websites, and connecting with an HR and/or legal professional can help you ensure you’re your organization’s compensation practices are in compliance with current legislation in your jurisdiction.

Links and Resources
Issues may include, but are not limited to, wages, leave options, bonuses, advancement opportunities, termination pay and more. Auditing your compliance with legislation annually is time consuming yet critical to the sustainability of your organization.

Next Section: Wages and Salaries