5 Compensation Sins & How to Avoid Them

When most of us think about compensation, we think about something super complex. But it doesn’t have to be.

In our latest episode of the High Growth Matters podcast, we chat with Kyle Murphy about the most common misconceptions that he sees across OpenComp’s customer base — of ~6,000 high-growth organizations — as he helps them find clarity at each point in every compensation decision. As Kyle leads customer advocacy at OpenComp, he draws from his experience in compensation and customer success at companies like PayScale, MedBridge, and more.

This blog summarizes that conversation and covers:

• Why it’s important to avoid compensation misconceptions as an HR leader
• The top 5 most common compensation sins
• Compensation benchmarking and salary benchmarking for remote pay
• Customizing compensation practices for your specific organization
  
  

To hear the full episode, visit this page, or subscribe to the show on your favorite podcast player, such as Apple Podcasts or Spotify.

Don’t miss the full episode: 5 Compensation Sins with Kyle Murphy

How HR leaders can overcome compensation misconceptions

Compensation impacts nearly every aspect of a business. Compensation is the biggest source of spend for any organization and plays a significant role in culture, company brand, and attracting and retaining top talent.

Many businesses lose talent and money due to overcomplicating compensation in ways that aren’t tailored to their needs. And a lot of that starts with the salary benchmarking and compensation benchmarking process, when companies use stale data from surveys. This exercise has gotten especially complex post-pandemic as remote pay is changing, as workers move to new places.

The 5 cardinal sins of compensation

Compensation doesn’t have to be complicated. By avoiding the following five pervasive misperceptions, Kyle says, businesses can streamline compensation practices and build a system that establishes a tailored culture that attracts and retains employees aligned for company success.

Compensation mistake #1: Businesses should base their remote pay strategy on what other employers are doing

The modern work environment has seen many changes over the past few years, but compensation management has remained relatively unchanged.

The major change affecting compensation, however, has been the development of a remote-leaning workforce. Businesses scrambling to create remote pay strategies tend to look to see what peers have done.

According to Kyle, this is a huge mistake.

“You should look inward because the answer to that question really comes down to who your jobs are going to and what your people want,” he says.

If your organization relies heavily on an in-office culture, creating a strategy that brings collaboration into a physical hub — even if it’s just a few times a week — will prove most beneficial. Conversely, if your organization doesn’t require in-office cooperation, you may want to recruit top talent who value more flexibility.

Ultimately, HR leadership should tailor remote pay strategies to the organization’s specific culture and needs. This should impact compensation benchmarking activities upstream.

Learn more by reading our definitive guide to compensating a remote team.

Compensation mistake #2: Targeting the top market pay percentile no matter what

Sometimes, it can be helpful to target the top of the market when salary benchmarking. However, it’s not always savvy to pay in the 75th or 100th percentile, says Kyle.

For example, entry-level positions offer great opportunities for young employees to gain skills to build their careers. As a result, these positions can often attract great talent, even without top-of-market pay.

Likewise, if your organization is mission-driven, and prospects are attracted by what you do and who you serve, they may be more likely to accept lower pay, especially in light of other non-compensation rewards, such as benefits and individual perks.

Rather than always paying top-of-market salaries, companies should analyze who they are hiring, why employees choose to work for them and what they expect as fair compensation.

Compensation Mistake #3: Believing salary ranges and market percentiles are the same

Another common misconception among those new to compensation is that salary ranges and market percentiles are all one thing.

A market percentile is a data point that offers a ranking system, Kyle explains. “Like standardized testing in school: If you scored at the 99th percentile, you scored higher than 99% of people who took that test. Compensation market percentiles are no different.”

Salary ranges are often determined by assessing market percentiles, although there are many other kinds of compensation data that’s more precise. A salary range includes the lowest and highest compensation numbers possible for a group of similar positions. These differences are crucial for HR leaders to understand as new pay transparency legislation goes into effect.

Learn more about the difference between market data and salary ranges here.

Compensation Misconception #4: Businesses must personalize market data

Not all of the data that you consider when building compensation strategies needs to be specific to what your organization looks like. You should be acquiring market data to build strategic ranges, but those ranges should be rounded from multiple data points.

“It's more important to understand what the competitive marketplace looks like and what your competitive set is for each job,” Kyle explains.

Compensation Misconception #5: Companies need to anchor to compensation data in real-time

Real-time data provides many benefits to businesses. However, in Kyle’s view, adapting compensation to real-time data is unrealistic and ineffective.

“You want to get blended snapshots in time to see trends where things are going as opposed to trying to get real-time data,” he says. Rather, the idea is for compensation benchmarking to compare peers in similar industries, locations, and company stages twice to four times a year.

Data changes constantly: Utilizing real-time data would require daily adjustments to compensation. Instead, businesses should re-evaluate compensation once or twice a year.

Shaping compensation practices with organization-specific knowledge

Kyle offers one major guiding principle for HR leaders regarding compensation: “Understand your business and how it relates to the marketplace.”

Determining compensation strategy will largely depend on your business lifecycle stage, what your team needs, and your organization's mission. Ensure you clearly define your compensation philosophy and strategy so you're not just reacting to the market.

“Your knowledge about your organization should drive your compensation practices,” Kyle says.

In the end, compensation is only as complex as you make it. With a little planning and enough know-how, you can avoid the compensation pitfalls so many others fall into and take a proactive — not reactive — approach to the ever-changing job market.

And that’s how you land and keep the top talent your organization needs to not just survive, but thrive well into the future — no matter what that future throws at you.

Want to see what real-time compensation benchmarking looks like?

To hear this episode, and many more like it, you can subscribe to The High Growth Matters Podcast on our website, Apple Podcasts, Spotify, or just search for The High Growth Matters Podcast in your favorite podcast player.