As we approach midyear and as signs point to an improving economy, now is an opportune time for you to assess your compensation programs, make adjustments for the rest of the year, and start planning for 2011.

In the first part of this article we discussed recent trends in compensation, especially around the areas of merit increases, incentives, and other rewards. In this, the second part, we present guidelines on where you should focus your time for the rest of the year. In recommended sequential order, we outline six steps you should follow to regain control of your organization’s compensation programs.

1. Determine where you stand compared to the market. It is difficult to make progress if you don’t know where you are right now. Investing in a market analysis to determine how competitive your rewards programs are compared to other benchmark organizations will help you answer and prioritize the following questions:
   
   
   • Should I readjust the compensation for employees who have experienced a salary reduction in the past 12 to 18 months?
   • Should we offer a 401(k) match again?
   • Do I need to increase the salary for employees who have taken on additional responsibilities due to the layoffs we experienced in 2009/2010?
   • How bad will it be if we don’t have salary increases two years in a row?

   The market is always changing; you need to know how you rate compared to the market now, versus compared to where you happened to be prior to the recession.

2. Define your compensation and (ideally) your total rewards strategy. “Market” is a range, not a magic number. To effectively apply benchmark data in the context of your organization, it is important that you define your compensation philosophy. Compensation philosophies typically answer the following questions:
   
   
   • How do we want our base, incentive, and total cash compensation to compare to the market (e.g., target market median)?
   • How do we define our comparable market in terms of compensation? Do we want to benchmark similar geographies (e.g., Midwest), industries (e.g., nondurable manufacturing), sizes (e.g., revenue or number of employees), or other criteria?
   • What is the right mix of base versus incentive pay?
   • Is there a need to customize our rewards programs for certain business lines, geographies, or job families in the organization?
   • What level of transparency do we want to have about our compensation programs?

   If possible, it is extremely effective to tie your compensation philosophy to a larger “rewards strategy” that considers the total employment proposition offered in terms of compensation, benefits, retirement, work-life balance, and other noncash rewards. By clearly and successfully telling the big-picture story about how you reward employees, you will be better positioned to retain your top talent as they evaluate other employment opportunities once the economy recovers.

3. Conduct a gap analysis to identify your current state. Armed with current market data, perform an analysis to determine how individuals are paid from a base and total cash compensation perspective in regard to your comparable market. Overlay your compensation philosophy to determine the gap between where you want to be and your current state. Are you afraid of what you might find? Keep in mind that this analysis is to help you manage your business; just because there are gaps doesn’t mean you have to address everything immediately—it just means you need a plan.
   
   
4. Make a plan. Partner with key stakeholders to make a plan to appropriately invest in the talent that drives and supports your business. Don’t wait to unveil a huge proposal; there should be no surprises. Instead, gather input from cross-functional leaders to identify their critical talent needs both today and in the future. Ask these leaders to answer at the very least the following questions:
   
   
   • Is the talent you need today the same talent you will need in 3 to 5 years? In 10 years?
   • Is there a need to customize your rewards programs for certain business lines, geographies, or job families in the organization?
   • Do you want to pay for performance, and if so what does that mean to you?
     
     
5. Prioritize. Now you know where you stand compared to the market, you have defined your compensation philosophy, you have identified your current state, and you have a plan for the future. Life is good, right? Well, don’t forget you still need to figure out how to answer those pressing questions listed in number 1! As expressed above, how you respond depends on your unique business needs. In general, here is how we would proceed:
   
   
   1. For employees who experienced a reduction in their salary, restore the salary to the market target rate you have identified for each position based on the benchmark data and your compensation philosophy.
   2. Ensure that employees are appropriately classified with accurate titles based on their current roles and responsibilities; adjust pay or communicate promotions as appropriate.
   3. Offer merit pay increases, if financially feasible. Assuming you have limited dollars to spend here, introduce (or recommunicate) pay for performance and make a genuine commitment to getting more money into the hands of the top performers. Do not provide increases to employees who do not meet expectations and define “top performers” to include the elite 10 to 20 percent of employees who consistently exceed expectations time and again.
   4. Reintroduce the 401(k) match. Really—this is number 4? Yes, it may seem short-sighted, but many employees are focused on simply paying their bills (or debt) right now, and retirement plan contributions are less a priority than cash in hand. We hope to have this at the top of the list next year (as in years past), but for today it takes a backseat to base compensation.

   These changes cannot occur overnight; we recommend that you get ahead to ensure you have the right programs in place by the first of next year. Because your employees are going to start asking about the future, don’t wait for Q4 to get started! Here is a suggested timeline:

   • Q2, 2010: Conduct a market analysis and define your compensation philosophy; conduct a gap analysis and adjust the pay for employees who experienced a reduction in their salary; ensure employees are appropriately classified.
   • Q3, 2010: Offer merit pay increases (if the timing works within the context of your organization, it will be advantageous to have six months of financial performance to guide your salary budget decisions).
   • Q3, 2010: Actively engage key stakeholders to prioritize and make a plan for 2011.
   • Q4, 2010: Communicate your new or adjusted plans.
   • Q1, 2011: Implement and continue to communicate.
     
     
6. When in doubt, over-communicate. It is unbelievably difficult for employees to focus on their job and remain effective if they are worried about the stability of the organization, the security of their jobs, and their ability to meet even the most basic needs of their family obligations. Furthermore, the grapevine will inevitably distract from work that needs to be done. Make time to communicate clearly, consistently, and frequently with employees about the state of the organization and its supporting compensation programs. While employees may not like the information they hear, they will appreciate the respect you offer them; hopefully they will come away informed and aware of the thoughtful decisions you are making in order to create compensation programs that directly support the organization’s success.

While it is difficult to juggle all that you are managing today as a busy HR professional, organization leader, and/or business owner (note that these roles are not mutually exclusive), keep in mind that compensation is linked closely to most all of your human resource programs:

1. Recruiting via the establishment of starting pay and bonus eligibility
2. Performance management through merit, cost-of-living, or equity adjustments
3. Succession planning through promotional increases and salary structure development
4. Retirement benefits to the extent that employer matches are based on a percent of pay or that pension payouts are linked to pay rates

You cannot afford to make compensation decisions on a whim, and you certainly cannot afford to miss this opportunity to regain control of your compensation programs in a time when your company’s leaders are looking to you for guidance, advice, and strategic impact.

If you missed part one of this article, read it here. To learn more, visit our compensation page or read a case study outlining how we teamed with the Town of Plainfield to redesign its compensation program.