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Developing a Compensation Package

30 October, 2015 - 12:38

Learning Objectives

  1. Be able to explain the internal and external considerations of compensation package development.
  2. Know how to develop a compensation philosophy.

There are a few basic aspects of compensation packages we should discuss before moving into the specific aspects of compensation. These foundations can assist in the development of a compensation strategy that meets the goals of your organization and is in line with your strategic plan.

Before beginning work on your compensation packages, some analysis should be done to determine your organization’s philosophy in regard to compensation. Before development of your compensation philosophies, there are some basic questions to address on your current compensation packages.

  1. From the employee’s perspective, what is a fair wage?
  2. Are wages too high to achieve financial health in your organization?
  3. Do managers and employees know and buy-into your compensation philosophy?
  4. Does the pay scale reflect the importance of various job titles within the organization?
  5. Is your compensation good enough to retain employees?
  6. Are state and federal laws being met with your compensation package?
  7. Is your compensation philosophy keeping in line with labor market changes, industry changes, and organizational changes?

Once these basic questions are addressed, we can see where we might have “holes” in our compensation package and begin to develop new philosophies in line with our strategic plan, which benefits the organization. Some possible compensation policies might include the following:

  1. Are salaries higher or lower depending on the location of the business? For example, orthopedic surgeons are paid higher in the North Central states ($537,000) than in Hawaii ($250,000), according to the Medscape Physical report of 2011.  1 Reasons could include cost of living in the area and fewer qualified people in a given area, giving them leverage to ask for a higher salary.
  2. Are salaries lower or higher than the average in your region or area? If the salary is lower, what other benefits will the employee receive to make up for this difference? For example, wages might not be as high, but offering flextime or free day care might offset the lower salary.
  3. Should there be a specific pay scale for each position in the organization, or should salaries be negotiated on an individual basis? If there is no set pay scale, how can you ensure individual salary offers are fair and nondiscriminatory?
  4. What balance of salary and other rewards, such as bonuses, should be part of your compensation package? For example, some organizations prefer to offer a lower salary, but through bonuses and profit sharing, the employee has the potential to earn more.
  5. When giving raises, will the employee’s tenure be a factor, or will pay increases be merit based only, or a combination of both?

Let’s discuss some internal and external factors in determining compensation in more detail.