Compensation Systems - A Complete Guide

[00:00:00] A Sustainable Compensation Strategy requires more than just catching the market vibe and paying whatever you think that is. It is a complete framework that can stand up to both leadership and employee scrutiny, as well as the new pay transparency requirements. I'm Andrea Adams and this is The HR Hub. Today I'm talking to Sean Rabel again about the pieces of your compensation framework that you should think about having in place.

[00:00:27] Sean is a compensation expert and founder of Gameplan Total Rewards. Alright, hi Sean, how are you? I'm good, nice to see you. Yes, nice to see you again. That last one was great! It's a hot topic, so yeah. By the way, for you out there, it's pay transparency. Go watch it. It was so good. Okay, but today we're talking about compensation frameworks. So Sean, tell me, you know, overview, high level, we'll dig into each piece, but what are the pieces of a compensation framework?

[00:00:56] Yeah, no thanks. Thanks for having me back. What's really important with compensation is not everybody lives in this space all the time. So we want to kind of go under the hood a little bit like what's in a comp framework. Yeah. It's how we organize our compensation. So I like to work with clients, because I was in house for 20 years and I've been consulting the last six. And so what's important is we think about these building blocks that just make, that help us stand up our compensation.

[00:01:22] So one is our philosophy. So what is our compensation philosophy? And that might be anywhere from our market positioning, how do we link pay and performance, transparency, right? Those types of things. So the comp philosophy is such a key part. It doesn't have to be thousands of pages.

[00:01:40] It could be just a couple key bullet points or statements around leadership alignment to how compensation is going to work at our organization. And the other nuance with the comp philosophy piece is making sure that sometimes when we go through all the work, it may be more aspirational. Like maybe we're not the P50 middle of the road. Maybe we have some gaps. So it can be a little aspirational too. And it should link to your business strategy and all those, but that comp philosophy is like the core piece.

[00:02:09] And then under that, you've got job architectures, all your jobs are part of your roles and what levels they are. And then you've got your pay bands or step grades, whatever. So comp philosophy, job architecture, pay bands or step grades. And then you're going to have a job evaluation system or a career framework. So that's an important piece when we think about how are jobs leveled and evaluated.

[00:02:34] And so compensation as a whole is going to have all these pieces. But in there is this career framework or job framework that allows us to look at junior jobs through senior jobs, right? From the entry level to executive and executive and helping to find that consistency wall to wall of our organization.

[00:02:54] So that when we think about an entry level operator to a vice president, how does the job problem solving and impact it take, you know, change as you go up and down the levels, right? So that's a piece. And then the last one is governance and process. And so authority to make changes. Can a manager approve 10% or more, or can they offer when they hire more than midpoint?

[00:03:22] So governance and processes around compensation, a job evaluation request, promotions, all those things. And that whole piece, that whole kit, that whole envelope is your compensation kind of framework set of programs. And those pieces that are in there kind of all connect together. And yeah, it's a complex one. And I think that's where we'll share what we can today for sure.

[00:03:49] Yeah. Okay. I want to start with at the top with the compensation philosophy. Yeah. I liken the, I have in the past likened a compensation philosophy to your, as like it's your compensation North Star. Okay. You, you described a little bit like in that intro there what it is, but can you dig into that a little more?

[00:04:14] And maybe can you give an example of one, like a compensation philosophy you've seen? Sure. Yeah. So there'd be kind of some key kind of like sections within it. So one is market position. So we are, let's say as an example, we're going to target P50. So middle of the half pay less, half pay more. So P50 is a very common percentile of what industry we are nonprofit. We are in Vancouver, right? We are a 25 million operating budget.

[00:04:44] So what is, what is the peer group, that data cut that you're comparing to? So when you pull data, it may, for some organizations, we want all industries, all sizes, but generally you want to narrow it to we're in mining and we're in BC, right? Yeah. That's a, that's a critical piece.

[00:05:00] Yeah. But like, let's say like you are a not-for-profit, sorry, and I interrupted you, but, and you're looking for a chief finance guy, girl, whatever person. And you are therefore competing with every other company looking for a chief financial officer. And so does your comparator change by position? Because that's what we're talking about.

[00:05:30] A hundred percent. Yeah. So one of the questions when there's a set of questions to help build it, which one is what's your talent kind of market that you're looking at? Where do you go to find talent? Is it just our industry? Is it all industries? So when you get nonprofit, great example, in certain back office, like finance, executive levels, you start to compete with for profit sector, right? Yeah. I could do finance anywhere, but there's other pieces to it, right? In terms of who is attracted to nonprofits, it's about the value, the mission.

[00:05:59] And unfortunately, I've just did some analysis. It's maybe a 10, 12% difference between a finance person and nonprofit less than a finance person for profit. So it can say, well, we can't afford that. So then you have to build an affordability, the whole what's everything we offer. If you're looking at a university, like a UBC university, they don't have variable pay bonus plans like some private sector companies. We can't compete on that. But our pension is pretty good. And we have a tuition program.

[00:06:29] So you do have to look at everything in your total awards offering when you look at market positioning. But we do want to see the data. So a lot of times it's like, well, can we just run all industry or private sector just to see what we're up against? Because we're seeing it in what we're trying to recruit, right? And so it becomes that discussion, well, where do we want to draw that line for us? And there could be certain jobs like in a retailer where the store manager is going to be a P75 top quartile. But for everybody else, we'll use P50.

[00:06:59] But certain critical jobs in sales, operations, we might use a higher point saying, you know what? We're going to intently pay more for those jobs. They're a unique job that has huge impact for us and a unique skill set. That can happen in technology jobs, digital jobs, same thing where you might carve out a job, a subfamily or a discipline and say, you know what?

[00:07:21] For that group, this happens a lot for technology areas and software jobs where we're going to have maybe a different philosophy piece for that area. Yeah. Does all that get reflected into the philosophy? Yeah. So you kind of build a table and you have kind of your different areas or business units, geography, and then it's all captured in a nice table. So you understand where it's consistent and where it's different. And that's where that kind of discussions with the leadership.

[00:07:47] And sometimes what you do is you start with one set, then we price it. Like, let's go get the market data and compare what we're paying. Maybe we already are paying P75. So a lot of it's getting that first set, run the numbers and then come back and say, yeah, that makes sense. Or, oh, wow, we want to be that, but we're never going to be that. So let's change our... So it becomes a nice, honest kind of dialogue about where are we to market? What is our market that we're competing with?

[00:08:15] Exactly what you just a great example, because it allows leadership to get aligned and on the same page. You know, what does this really mean to benchmark? It's the core part of the whole philosophy. The other pieces, just to finish off, you've got your pay for performance. How do you tie individual performance to pay? Merit, bonus. How do you look at recognition? What about internal equity? What's your position on internal equity and the checks and balances you're going to do around internal equity?

[00:08:42] So it allows you to go around the wheel and say, it's not just our market position to build a pay ban. It's all these pieces around, or what about governance? Who makes the decision or authority to make a pay decision or a promotion? So you can layer these things in into that comp philosophy document that allows us to have that North Star. This is where we're... And sometimes they get a little more verbose because, you know what, we need to document a bit more. That's okay.

[00:09:07] And sometimes it's like there's a version in front of the curtain for staff that's very simple. And then there's behind the curtains, it's more complex for HR and the leadership team. And I always like to use the curtain kind of analogies. Like, do we show the whole thing? Because it could be just overwhelming for staff. But it's like, you'd still want a product that says, this is our philosophy. All right. The job library. You know what? I don't... And job architecture. Yeah.

[00:09:35] Like, I'm conceptually having some trouble with this. I don't know why. Can you talk about how, like, that is different than just, you know, collect all your job descriptions in the same place? Sure. Yeah. So the best way to describe it is there's a concept of job families and subfamily. So families being HR, finance, IT, as an example. Technical, yeah. Subfamily. So if you kind of then, so you kind of group them in the highest level of like a job family.

[00:10:03] A lot of the compensation surveys are organized the same way. Families. Okay. And subfamily. Subfamily is a discipline. So within IT, you might have a discipline of service desk, which would have a different pay rate than digital solutions, right? Or doing enterprise architecture or networking. That subfamily or just allows us to really understand how jobs connect together. Yeah. And sometimes the market rates are different. So we might say in our IT job family, we pay this.

[00:10:33] But for certain subfamilies, certain disciplines in the digital space, software space, we're going to do a different compensation strategy. So it's just organizing your jobs in those constructs allows you to look at them differently from a market perspective. And also then the other layer is the level. So then you can say, which jobs do we have at the junior level, mid-level, senior level, management? And so then allows you to scrub that and say, is it one job per person or actually these are the same jobs?

[00:11:02] You're getting into the nuance of what are your job descriptions or postings, which is always like, oh, we have to write our job. So there are simple ways to organize like the key elements of a job. And there's a lot of great tools for that to not be overwhelming. But that's what's key is that it's not just about the title. It's about the purpose of the job, requirements of the job. So you can clean that up. These titling creep, they call it, where it's like all of a sudden everybody's a VP. And so we had one.

[00:11:31] So with a job architecture, one of the rules we had from an executive team at this was the thou shall not list. It was just easier to say thou shall not call yourself president. Thou shall not call yourself vice president unless it's approved by, you know, whatever governing body. So the thou shall not list allowed us to say, well, you're not using these titles. And then you work through it because it can be very emotional and sensitive. Like I'm the associate director of blah, blah, blah.

[00:11:56] And through these projects, you start to understand, are we going to pull the bandaid on the title or just, you know what, we're going to fix everything else. And we're going to legacy the grandfather, which we're now using the word legacy from a DEI perspective. Grandfathering has a context there. So we are using the term legacy more often in our work. And I think that's important. So that's the job architecture and why it has so much value, though it can be like a bit onerous sometimes.

[00:12:24] But we'll just start with like pull everything out of your payroll system and then like start to organize it. Now the career framework, you talked about a career framework in that. Yeah, exactly. What is this? So think of it as there are management tracks. So those jobs that get work done through others. There are professional jobs that roll up their sleeves, do the work themselves and may have a special degree diploma experience, a professional kind of stream.

[00:12:52] There might be entry level to senior level, just like management. You might have supervisor all the way to CEO. So management. So it's the nature of work, really. And then you might have a sales career stream, right? You might have an operations one, an administration for front desk clerk reception all the way through office manager. So these career frameworks allow us to organize the jobs wall to wall, regardless of job family, just to be able to say these are the entry level jobs. These are how we describe management.

[00:13:22] Are we going to have manager and then director? Are we going to have manager, senior manager, director, senior director, VP, SVP? Like you can get really complex. Yeah, yeah, yeah. And so that's important. It creates a bit of like, no, we don't want senior managers here. It's just manager and then director. And if somebody wants a senior manager, well, I don't know. Like, so it becomes, do we want extra levels? And as you get bigger, you start to see, you know what? We're going to need a senior manager level because it's a bit bigger. They've got two big areas.

[00:13:50] They're running that job, not just one area. So there are nuances. And you'll see it in the Mercer or a Towers compensation survey. They describe different levels of management professionals. So to do benchmarking, to put data into a market data source and to get data out of like a Mercer or anything, having a career framework helps from a job matching. So it actually opens up these career discussions and organizational planning. Like how many P3s do we need?

[00:14:19] Like it starts to see like, wow, we're top heavy over in this department. Everybody's a P5, you know, like, like it actually, you can see things from a career framework lens. It gives you all these, I call them like spokes of value add that when it's not overly complex, but when you build it a little bit. But once you see it, it allows you to start making different, have different discussions. The final thing I would say is it does give you your baseline for evaluating jobs because not every job has benchmark data.

[00:14:49] You might have a hybrid or a mix of jobs, something unique at your company. The career framework, the evaluation system that goes with it, allows you to find that internal leveling as well. Like this is, because not every job is going to have, you know, something in the survey of what it should pay. So that career framework, that internal leveling system gives you that benefit too. So when do we develop the pay bands, pay grades, pay bands? So the key is that they would sit on top of those, the leveling that I kind of mentioned, and you've got your job library.

[00:15:19] And so once you've got your job kind of list, you've got your leveling system, then you build and you start pulling market data to get a sense of like what each job should get paid. So that's what you're looking for. So that's what you're looking for. So that's what you're looking for. So you're looking for. So, you know, so you start pulling in market data for your jobs. And what you're looking for is about 50% of your jobs. That hits about two thirds of your employee population. You don't have to hit every single job.

[00:15:48] So I'll say that again, about half of your jobs. So if you have like 100 jobs, you're trying to get about 50 jobs of data point, hitting about two thirds of your employee population. So you're trying to get enough anchors up and down different levels, different departments or job families to build that out. And then you start to build out your pay bands. What are those midpoints? And then start to build kind of minimums to maximums. The simplest ones are the 80-120 rule. So 80% to minimum, add 20% to the max.

[00:16:18] But there are nuances that you can adjust for. Junior jobs may not to be so wide. You can make them narrower. Executives, you may want wider bands. Right, right. And then there's like step structures. There are a lot of nuances to pay bands. That's generally how it works. And I think that's where we're trying to demystify the benchmarking. And you're like, well, we have three jobs in the same P3. So we do a lot of education of like how does benchmarking work?

[00:16:47] Because if you don't do a good job explaining that to managers, it becomes like this black box. And in HR and compensation, you want to have more data than your employees do, right? You should. But you want to know what they're seeing and reading and gathering from recruiting publications or online. So I always with pay bands and building them, you build them with our data. We look at what we currently are paying people.

[00:17:14] But we have these ongoing dialogues with recruiting, with hiring leaders about what's happening. Because maybe there's something that we didn't get wind of in compensation. So we call it like this ongoing total rewards compensation dialogue that you have to keep having. Because you build the bands, you execute them. What you've never done. Once they're set, there could be something that happens. So that's where pay bands fit in. And it's an interesting one because this is where the art and science of comp comes in.

[00:17:44] It's like you do regression analysis and all this stuff. And it's like, how did you come up with this? Because if you're not a comp expert, you don't live and breathe. It's like, how did you do this? So that's what we try and simplify things and show how does the math work. That's so important and not overcomplicate it. Because I work with a lot of CEOs who are like, it's 100,000 for that job, 150 for that job, 200. Like, they'll have a number, right? These are executives, leaders. I want to hear what their thoughts are. I'm going to have my data sets.

[00:18:13] But I do want to hear what they might write on a napkin saying, that's the range. Like, I want to have that dialogue. Oh, yeah, yeah. And like, where are you getting here? Cool. Like, let me show you my data. Let's have this together. Versus the, I know more than you. Like, you know, you have to really be collaborative in the space of building bands. I think that's so important. So for an organization that has nothing, that has no... Zero. None of this framework that we've talked about. Sure.

[00:18:40] They, like many of my clients, you know, have been small enough to get away with, well, I feel like this is what this goes for in the market. That's what we're going to pay. Right. Where, and so now they have to build their framework. Where do they start? So, yeah. So, yeah. And like I said, we've, we've worked with some smaller clients too that may have like less than 20 employees.

[00:19:03] And so when you do a simplified like comp philosophy and kind of like just a simple one, but also your jobs aren't too many. When you could actually build a really simple career leveling framework of like just two streams, like individual contributors, one, two, three, four. So like junior, mid-level, senior, like team lead. So just like you're just grouping them and you can actually use, there's a lot of AI tools.

[00:19:28] You can say, give me some level definitions for one, two, three, four of individual contributor jobs. Like you can actually use a lot of these free tools to give you some language. Then you could say, I want a manager one because generally even small companies have a few managers. Right below the owner maybe, right? So they may have an owner operator model. So then it's like, yeah, we have a supervisor and a manager, maybe just two levels.

[00:19:50] And just building a simple, like even a general definition, even if they don't want to go into like problem solving factor and external relations, like all these more complex job factors, just even a basic of a level descriptor gives some meat on the bone around why these jobs are here and these jobs are here. And it's really about, we always think about like how much oversight do they have? If they make a mistake, what happens, right?

[00:20:17] That gives you a sense of this job is more senior because it's got to do more with the external. If it makes a mistake, it impacts not just their team, but the whole company. And so you're asking different questions to validate why a job is here or here or here. And that decision grid, that leveling framework is really can be done very for a small organization. And then it can grow over time and you can evolve it. But that's, it doesn't have to be overly complex.

[00:20:44] But it's sure when you do a little bit of that work, it's why it can be done in a short window is going, oh, okay. These are a simple way to describe junior, mid-level, senior, and we have a couple levels of management. And that works really well. And that's kind of where I think it's important that we don't have to over engineer these things because it's like meet your company where you're at. Yeah. Bad complexity over time. The one thing I forgot to ask about was governance. We didn't, we. Sure.

[00:21:14] Any quick thoughts about governance? Because that was part of the framework. Yeah. So the governance piece, I think the best example would be the one that gets the most airtime with clients and with executives is the authority matrix. So basically it's like who can sign off on what? So, so it might be, hey, any VP can sign up to a 5% increase up to, as long as they're in the range.

[00:21:39] But anything that's like more than 5% and above the range max needs to go through some steps with HRs for some checks and balances. So that authority matrix of like different scenarios and who can approve what really allows to provide some bump, some guardrails basically to protect the equity of your system. And so, hey, we have a new job. Can a manager say this is the job level? And that's no, it's got to come through somebody to check that that is the right level and what we need.

[00:22:08] So that's to me, governance is about some of those clear policies for setting pay and jobs and the level that goes with it. What if somebody's moving locations from a high cost of labor to a lower cost of labor? Oh, yeah, yeah. What are your rules? Do you just, no, they can get paid, whatever. Or do you're like, no, we might actually reduce their pay if they've asked to go work in Kansas City, but we're awkward in New York City. Do we keep paying them a New York City wage while they're, but they moved and that would be a different cost of labor. So you have to make these.

[00:22:38] So those are just examples. But for me, it's like, what are the scenarios? And that's usually what we kind of like, what are the scenarios that we struggle with the most that we feel are the most inconsistent? And how do we build guardrails and rules? But I think sometimes it's like, well, you're policing us. Well, no, it's like we want to know when this happens. Work with us. Let's, let's, because maybe something's happening. Like we did this in, I worked in construction for a while and there was something going on with trying to find superintendents in Toronto on the GTA.

[00:23:07] And it was like, the max didn't work. And so we did some quick working with them and said, you're right. We got to maybe do a temporary increase to the max because of what's happening in supply and demand in Toronto for that job. And so it wasn't like, oh, they're going, they want to pay over the max. How dare you? No, something's going on. And so that's where the governance piece and how do you treat it? And it shouldn't be seen as policing, but as creating conversation and solutions together.

[00:23:35] It's also about maintaining integrity to your whole compensation framework. A hundred percent. Like, you know, these things can get so out of the hand. And then, and then you've got angry employees outraged about unfairnesses. It's managing risk. It's managing risk. It's doing what's right. And I think that's what you want is employees that they knew, sometimes they don't care or they not know, but if they knew what was happening, they were like, oh, I'm glad you're doing that. I'm glad somebody's got some checks and balances. That's a good thing. Like, it shouldn't be a secret.

[00:24:05] I think what happens is people go, I used to be able to sign off whatever at my operating unit. I could do whatever or give my, you know, this can take away some of that authority. And that's the change piece of like, no, we've got to, we've got to pull that. And then you're watching activity going, well, they keep doing 2% increases all the time to the same person over like a six, because they're under the 5%. It's like, we're going to watch activity. So you do need a bit of like a wall of shame, but a wall of activity going, hey, manager,

[00:24:36] Johnny, I see you're following the rules, but you're doing a lot. So, so to help us understand what's happening for the employees or something you're not aware of that you're trying to achieve. And usually it's not a bad manager. It's just, they're trying to hit something. They're trying to play by the rules. So something happened. The person's in the wrong job. They feel they're under, like, so whatever. I just really encourage anybody in this space, ask more questions because you don't know what you don't know. Yeah.

[00:25:03] It's just so important because it creates that relationship and trust between HR and the business. So, yeah. So true. What is the number one thing you think will cause a compensation framework to fail? And how would we fix it? Oh, I would say. You talk about a lot. I mean, I guess the adoption piece.

[00:25:29] So if it's too complex, it's not maintained, there's not clear ownership. So that's probably the biggest piece I would say is lack of adoption by managers. So that because it's, you know, so how do you keep it simple? What are your training, right? Treat it as a living system. I think those are kind of ways to mitigate that. That's the number one thing. It's, yeah.

[00:25:53] I would just, it's, we over-complicate, over-engineer and we operate like police officers versus like collaborators and stewards saying, you know what? You see your business unit. You see what's happening. We get to see wall to wall. Let's share what's going on and figure out the right solution. And let's not wait for something to become a big burning, you know, fire. Yeah. When it's just maybe a bit of a spark and some smoke's coming. Like, so where's the true fire? That's generally where we see it.

[00:26:21] And then sometimes we over-engineer our job libraries. It's just, there seems to like be a job for everybody. So I think challenging on job content, like what is a unique job versus creating another version and a senior this and a senior that. Yeah. And it's like, is it? So I find that's, I mean, I have fun with it, I guess, because I'm like, there's something I don't know why you need to do this. So I work with companies where it just feels like they've over-created a structure, but then there's no one in a lot of the jobs.

[00:26:50] So they just sit as a, it's set as a structure, but there's only people in certain pockets going, well, why do we create all these? Well, it's like, well, in case we did need them and we want to show progression. I had one of those recently. You should keep it simple. You're not very big yet, but anyway. Yeah. Where can someone learn more about this and also about you? So yes. So gameplanetorewards.ca. I'm also on LinkedIn. So Sean Rabel.

[00:27:21] If they want to reach out, connect, happy to chat with folks. Yeah. This space, I mean, there's, there are obviously the HR publications and World at Work. So Total Rewards Association. We've got a BC chapter, BC Total Rewards Network, where people can join. There's a small annual fee, but there are, if you really want to deep into discipline, there are groups that do webinars. Well, thanks, Sean. That was actually like, again, that was so helpful.

[00:27:47] I'm thinking about really the overall complexity to it and that us, HR generalists, you know, especially if we get into a complex, larger organization, you might really need some help with this, but you know, use AI, all of that. Also check out the other conversation that Sean and I had about pay transparency, which is probably coming to a location near you. A link to that is right here. Thanks for watching out there. We'll see you next time.