The 5 Sins of Compensation
Does the economic slump of 2022 mean the Great Reshuffle is over? Signs point to no.
With 11 million job openings in June and 40% of workers planning to quit for other employers, companies are still fighting to win and keep top talent. Only now, they’re doing it with a tighter rein on spending.
At the center of it all is compensation, a company’s largest expense and a key factor in whether an employee accepts an offer or stays put.
To stay competitive, companies must make smart, data-driven decisions throughout an employee’s tenure with a company. In this guide, you’ll learn the top compensation mistakes that companies make during five pivotal stages in the employee lifecycle — plus strategies and compensation tools to help you get it right faster.
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How you manage compensation in the interview — and the foundational steps that lead up to it — can influence more than a candidate’s decision to sign on. It can affect your company’s finances, pay equity, and ultimately, your company culture. Here are the top 3 compensation mistakes companies make in the interview stage and how to prevent them.
Mistake #1: Ignoring market drift and variance
Solution: Use relevant, quality data to create pay ranges or salary bands and post them in your job descriptions
Before you post an opening, do the pre-work. That means compensation benchmarking and market analysis to learn how your compensation plan compares to your competitors’ and creating job levels and pay bands.
To get the most accurate picture of the current market, choose salary data that is:
- Less than a quarter old. As recent months have shown, the market changes fast. Choose a data provider who can keep up.
- Relevant. Choose data sourced from companies who are similar to your industry, size, funding stage and location for an apples-to-apples comparison.
- Reliable. Use data that’s provided by employers and verified by a third party. Data that’s self-reported by employees is often inflated and doesn’t reflect market variance.
Mistake #2: Waiting to discuss compensation until the end of the hiring process
Solution: Explain your compensation philosophy upfront and confirm it aligns with the candidate’s expectations
You can avoid most disconnects about compensation by simply starting the pay conversation as soon as possible.
The first time you call or meet with the candidate, confirm that they’re comfortable with the salary information you’ve shared. It’s possible that they missed that information in the job ad, or a recruiter never shared it.
This is also an opportunity to add context to the numbers:
- Explain your compensation philosophy, the formal statement that explains how your company pays its employees. For example, “We pay in the 75th percentile of the market rate for San Francisco for all of our roles.”
- Share the source of your compensation data. How old is it? Is it reported by employers or employees? Is the data specific only to companies of your size, stage, industry, and location?
- Discuss the salary range. What upside is available to that person within the pay band before promotion? What career progression paths are possible from there?
- Be open about job leveling. If you’re targeting multiple job levels, let the candidate know the reason why, and how you’re going to evaluate them to determine the job level that best suits their skills and abilities.
Starting the pay discussion early has two major benefits:
- Avoids wasted time for everyone. If the gap between a candidate’s expectations and your budget is too wide, you’ll likely never come to an agreement.
- Establishes a trusting relationship with a potential employee. Your transparency shows a candidate that pay is not random or personal, but part of a data-driven strategy.
|A word on pay equity:
As you’re talking compensation, do not ask candidates about their salary history. It may seem like a routine question, but it can lead to harmful results for the candidates, such as unconscious biases that affect how you perceive their skills and abilities. And if you base your offer on a person’s salary history, you can inadvertently perpetuate pay inequities.
Fresh, relevant and reliable market data paired with job levels with clear criteria for abilities and experience can help you pay fairly, not build on the mistakes of others.
Mistake #3: Making compensation exceptions without considering your overall strategy
Solution: Put limits around which roles you’re willing to flex for (and how much)
Never hire without a plan. It’s essential that your hiring team, managers and other stakeholders agree on the abilities and experience required so you can target the right job level and pay range or salary band.
When talent is critical to your business, you may need to go higher in the range or above your max. That’s common among growing companies. Make sure to cap on how far you’re willing to stretch your budget to win this talent, and limit the number of exceptions you’ll allow. Better yet, track exceptions within one database for future reference. Every hire shouldn’t be an exception.
If you’ve talked compensation and gotten to know the candidate during the interview stage, you’ll be in a better position to present an offer they’ll accept. Still, there are a few missteps that can undermine the positive progress of the previous stage. Here are the top 3 mistakes companies make during the offer stage and how to prevent them.
Mistake #1: Making an offer before the candidate is ready
Solution: Check with candidates about whether they have questions or concerns
You’ve completed all the steps in the interview process and you’re ready to present the offer — but that doesn't mean the candidate is ready to receive it.
Make sure they have all the information they need to understand the role, offer and the benefits of joining your company. Give them another opportunity to ask questions so you can address any concerns or objections, rather than leaving them to guess the answers as they weigh your offer.
Mistake #2: Allowing big tradeoffs between cash and equity
Solution: Understand what’s important to the candidate and present options within certain boundaries
If you give candidates two offers with different ratios of cash and equity (lower cash–higher equity, and the reverse), you’ll run some risks, including:
- Setting the stage for disappointment. The multiple-offer strategy reveals the higher ranges for different scenarios. That means you’re also offering less ideal versions. And even if the candidate chooses the offer they want, knowing they’re getting less than the top of the range for either cash or equity can be disappointing.
- Errors in record-keeping. If a candidate opts for lower cash, there’s a chance later down the line that a new HR team may overlook the tradeoff. For example, the pay for an employee who chose lower cash and higher equity might be adjusted so that they’re at the high level for both.
Mistake #3: Perpetuating information inequity
Solution: Educate candidates about the value of equity
Equity is so complicated that even the most seasoned execs can benefit from training on it.
Candidates who are less informed about equity might opt to receive less of it. Or they might not understand the potential value of offers with higher equity than cash and decline. This knowledge gap means workers could miss out on a considerable amount of money, and companies could miss out on excellent employees.
That’s why it’s worth investing the time to educate candidates about the equity component of your offer and what it could mean for them long term. This shows them you care about helping them make the best decisions for themselves and is another way to establish a positive and trusting relationship.
While quarterly reviews don’t always involve compensation, they’re an important step in the employee lifecycle. Here are the top 3 compensation mistakes companies make during quarterly reviews and how to prevent them:
Mistake #1: Skipping quarterly reviews
Solution: Run quarterly reviews to assess employee performance regularly
Keep quarterly reviews on the calendar. If you’re skipping them, you’re missing benefits such as:
- Inspiring employees to perform better. Meaningful feedback can help employees level up in areas they might not realize need improving. And studies show employees crave feedback. Millennials, who make up 35% of the workforce, are among its biggest seekers. However, only 17% of millennials report receiving meaningful feedback at work.
- Learning about concerns and problems while there’s time to fix them. Quarterly reviews are also opportunities to get feedback from employees about the company, department and your own performance as a manager. By simply asking “How are you doing?” or “Is there anything you need?” you can gain valuable information that can help with retention, engagement, and morale.
Mistake #2: Ignoring the signs you’ve misleveled an employee
Solution: Adjust pay appropriately if your newly hired employee is exceeding expectations
Quarterly reviews are your chance to spot any mistakes made at hiring, such as placing an employee at too low a level.
If you spot this mistake, make the salary adjustment ASAP because if their compensation doesn’t keep pace with their performance and output, you may lose them to other companies who’ll pay at the right level.
In the movement toward pay transparency, it’s now common for workers to share salary information. If other employees learn that a new hire received a raise or promotion, they may assume favoritism. To avoid this, be transparent about the fact that it was about correcting an error.
Add this to your list of trust-building opportunities.
Mistake #3: Ignoring your unconscious bias
Solution: Become aware of your unconscious bias to ensure you’re evaluating employees fairly
Unconscious bias (also known as implicit bias) refers to false assumptions, beliefs and stereotypes that influence your decisions without your awareness. Unconscious bias during quarterly reviews could mean favoring:
- In-office employees over remote and hybrid workers
- Employees without children over parents
- Employees who got the opportunity to take on challenging projects over those who didn’t
- People with similar interests, personalities, education, background or race as you
While biases are invisible, their effects are evident in pay gaps, such as the one that sees women earning just 84% of what men earn – a gap that’s held firm for the last 15 years.
To help prevent unconscious bias, seek help from a third-party consultant. Or join a group of like-minded professionals to learn from each other about creating more equitable companies.
During merit cycles (aka annual reviews or focal reviews) employees are rewarded with raises, promotions or bonuses, so there are several compensation considerations in this stage. Here are the top 3 mistakes companies make during merit cycles and how to prevent them:
Mistake #1: Giving raises based on gut feel
Solution: Create standardized guidelines around how performance affects pay
Have consistent guidelines and clear criteria for performance ratings and pay increases.
Guidelines and criteria help managers be better and fair decision makers. They also help employees understand the process, and what goals they need to set to get to the next level.
To have the most meaningful conversations, managers should also be trained how to talk about compensation.
Mistake #2: Over-greasing the squeaky wheel
Solution: Standardize your assessment of employee performance
If an employee complains about their compensation, claiming friends make more for similar roles at other companies, you may be tempted to make adjustments to keep the employee. However, you risk overvaluing that employee's contribution over another employee who isn’t questioning their comp.
Do your best to ensure the employee is at the right level and that you’re using the same performance metrics for all employees. Base rewards on those metrics, not external factors.
If an employee isn’t ready for the next level, help them understand what’s expected of them to get there.
Mistake #3: Making decisions in a vacuum
Solution: Have calibration sessions with the greater leadership team
To make the best hiring and compensation decisions for their employees and the organization, managers need insight into other teams and departments. Regular calibration sessions can help managers:
- Get aligned on criteria for increases and promotions
- Highlight top performers and critical talent
- Learn how other teams are performing for a basis of comparison
- Identify the most essential staffing needs to fit budget and performance goals
How you treat employees during company milestones such as new funding rounds, layoffs or acquisitions affects headcount, finances and morale. Here are the top 3 compensation mistakes companies make during major milestones and how to prevent them:
Mistake #1: Immediately following layoffs with salary increases
Solution: Hold off on retention bonuses until the end of a specified period
If you lay off a number of people and then immediately give remaining employees an increase, you create a lot of distrust in the organization. Employees who now have to absorb the work of colleagues who were let go will now question whether layoffs were necessary.
If you want to keep a critical employee for a certain period before they’re laid off, offer them a retention bonus that’s paid at the end of that period.
Mistake #2: Leaving employees who were terminated in an acquisition empty-handed
Solution: Take care of the employees who helped you build the company
If you’re going through an acquisition and identified people who won’t be part of the transition, take care of those folks. They helped your company succeed, so reward them with a severance package that acknowledges their contribution to getting your company to this next level.
Employees who stay will appreciate that move, too, because how you treat employees during all stages of the employee lifecycle becomes a part of the company culture, building either negativity or trust.
Mistake #3: Relying only on recruiters and candidates for international compensation data
Solution: Collect quality market data so you can produce accurate pay ranges for new international roles
The rules for reliable data apply to international hires, too. If you’re expanding outside the United States, it’s worth investing in fresh and relevant salary data for the local market.
Do not base your compensation on:
- Local cost of living
All the above are good indicators and data points, but relying solely on them makes comp an art rather than a science. That puts you at risk for overpaying or underpaying.
Mistake #4: Ignoring the new comp benchmarks for your new company valuation
Solution: Make comp adjustments to ensure everyone is paid at the new market standard
New level, new market data. After each funding milestone, reevaluate your compensation benchmarks to ensure your salary bands are still appropriate. If you make adjustments, update your compensation philosophy, too.
If possible, update pay for existing employees so you don’t have wide pay inequities between them and new hires.