Introducing a new addition to Curo’s Blog...
Curo is pleased to welcome to our blog, Dragana Dzelajlija who started out her Compensation career as an 'Accidental Compensation Analyst' when she got hired on at an Engineering consultancy within HR for a contracting role. What started out as 2 month role focused on delivering analysis of internal gender pay gap reporting, salary bench-marking, and ad hoc cost analysis, turned her into a full-fledged employee.
As a result Dragana has experience working on setting salary bands, employee bench-marking, financial forecasting, cost modelling, software systems implementation, external gender pay gap reporting, profit share pay out, and various other Compensation duties. Her focus on our blog initially will be: The Beginner’s Guide to Compensation.
With her Project Management Education, past event management experience, and her Compensation history, Dragana is a great fit to Curo – now working as the Project Manager for our North American and Australian clients.
If I’m being honest about my own start in the compensation world, what I knew about comp was fairly easy to answer – I didn’t know anything.
While I found the Merriam-Webster Word of the Day an interesting email to read, it didn’t provide me with a satisfactory definition of what compensation, or remuneration, was – the act or fact of remunerating, otherwise known as “to pay an equivalent for”. That’s what the definition said to me – it’s about pay. That part I understood, but what type of pay? It surely wasn’t all related to salary? Did companies differ in their pay structures and what they offered, and how did they know the amounts employees should be paid?
Being in the compensation world for several years now, I have a better understanding of the main pay structures available that encompass both fixed and variable compensation types. Let’s review some introductory topics for beginners:
Salary – This one’s a fairly obvious one and Merriam, clearly my favorite website after Google, defines it as fixed compensation paid regularly for services. It is the expected amount to be paid on a regular basis, whether at an annualized rate distributed on bi-weekly/monthly payrolls or an hourly wage – it is a fixed set amount so that an employee knows how much to expect each payment period. Also known as ‘the rate for the job’.
How do we know how much pay to set upon our employees?
External Market Data – Market data is a great indicator what the market is doing in terms of pay based on specific job titles, or codes, and locations. Something to be conscious of with market data is that it’s backwards looking and reflective of a salary in a specific point in time in the past. To make it more relevant, you would typically apply an aging factor to attempt to reflect the current market position. This aging factor should take into account inflation, standard of living increases, and general market movement. The use of market data is an art and not a science – so you can’t follow it by the book and need to consider other factors as well.
Recruitment Trends – What are your recruiters telling you? Are they having difficulty filling specific types of roles? Supply and demand will have an impact of what pay you set employees at. If there is a low market supply with a high demand, premiums are often offered to entice new joiners. This may also be more representative of current trends in a hot market were demand for skills is moving quickly.
Internal Equity – Does this position already exist internally? What are other individuals in like roles being compensated? Of course there are several factors that can contribute to an individual’s pay such as tenure and performance but generally you will have a salary range for specific roles within the same location.
While external market data, recruitment trends, internal equity and other factors such as employee accomplishments and previous wages do have an effect on pay, it is highly important to consider the budget that you have and funds that are available to spend. So determining the rate for the job is really a calibration of all these factors.
Allowance – Not to be confused with the $10 per week your kids may get for their chores, allowances are another form of a fixed payment amount. Allowances account for an employee’s out of pocket expenses incurred on behalf of the firm. Allowances come in many different forms and sizes related to the types of expenses incurred by the employee in order to do their job. The type of job, the seniority of the role, and in some cases location of the employee play a factor into the types of allowances given.
Car Allowance – One example of a common allowance, a car allowance is provided as compensation to employees who use their personal vehicle for business reasons. A car allowance is determined primarily from two estimates: the number of business-related miles (or kilometers for our Canadian friends) an employee drives and the operating cost of the vehicle. The number of miles would determine the gas expense with the operating cost covering insurance, maintenance, repairs and depreciation.
Other allowances include: Housing allowance, Travel Allowance, Parking Allowance, Higher Duties Allowance, or even a Clothing Allowance which is common in countries such as India.
Bonus – Bonuses are a type of variable compensation in that they are not normally consistent nor fixed such as salary and allowances. The amount of bonus pay out is typically reflective of two factors: individual and company performance, and bonuses generally look backwords to reflect performance leading up to this pay-out, not to be confused with incentive plans which are forward looking.
There are many different types of bonuses that companies may administer, some common examples include:
Discretionary Bonus – This type of bonus is generally not used as an incentive, which means it is not linked to specific performance figures but rather is awarded at the discretion of the employer typically as recommended by the employee’s reviewing manager for performance in the past year. The manager will have a set budget that they can allocate among their employees and will take into account the employee performance to determine the amount of their bonus. Increasingly companies are moving away from wholly discretionary schemes as more governance is required over who gets awarded what.
Profit Sharing – The name says it all as with this type of plan employees are sharing in the profits of the company. This can occur in different periods either quarterly, semi-annually or annually as a result of past company performance for that period of time. In the case of a poor company performance period, the pay-out per employee will be less or at times, none at all. An employee would receive a % pay out of the profit based on their annual salary. It is not uncommon that an employer will also allocate a set number of shares within the pay-out formula that’s based on an employee grade or job band, so is not related to the individual’s performance and is more of an across the board award
Sign-On Bonus – When top talent is difficult to come by, a sign-on bonus is typical for employers who are trying to secure a highly competitive resource. Sign-on bonuses are used to entice the new hires to join the firm as a sign of good will from the employer, and also to compensate for any payments that they may be soon missing from their current employer, such as an upcoming bonus or profit share pay out. The amount of this bonus varies based on how much the employee is expected to receive from their current employer.
Key Performance Indicator (KPI) Based Bonus – In contrast to the discretionary bonus this type of award usually combines a basket of metrics or key performance indicators reflecting individual and company performance with different weightings. There are many variations of structure. By breaking down goals into measurable pieces of work, KPIs help organizations reach their goals. They also improve morale by showing employees exactly what they have to do to receive incentives.
How do all these different pay elements come together to show an employee what they are actually earning? Through their total compensation.
Total Compensation – this is the summation of the different pay elements that are included in an employee package – typically their salary, allowances, and bonus amounts for that year. It shows the employee what their complete take home payment amount was for that year for both in fixed and variable pay components.
Total Compensation can also be bench-marked in the industry so you can see where your employees are matched against in the market. Regardless of the different allowance and bonus offerings you have in your organization, it is important to ensure these are reviewed and updated accordingly to help you retain your top talent.
I hope you enjoyed the first installment of the The Beginner’s Guide to Compensation and now have a better understanding of the different pay elements that can be involved in an employee’s total pay compensation.
What is Compensation?
How a company car allowance is determined:
Types of Bonuses:
Profit Sharing Plan: