6 Steps for Creating a Fair & Equitable Compensation Plan
6 Steps for Creating a Fair & Equitable Compensation Plan
The ability to attract and retain employees who are truly excellent is critical to your organization’s success. With the competitive market for talent plus a lack of visibility into fair market rates, it can be challenging to budget for new positions and respond to pay inquiries from your existing team. Developing a formal compensation system to standardize pay decisions will not only protect you as an employer, but also elevate you to one of the best in your industry.
In addition, employees want to know that there is a fair and transparent system in place. A formal system engenders trust and communicates the organization’s expectations to the team, so that employees can focus on excellence in their work. Further, it keeps you competitive in the market and supports your managers and supervisors in planning and decision making.
In the United States, racial injustice, bias and discrimination have prevented people of color from access to wealth-generating activities for generations. Statistics lay bare a pervasive problem with pay equity: on average, women earn 84 cents for every dollar that a white male counterpart makes, with Black women earning 63 cents and Latinx women earning 54 cents.
As organizations, we are economic and social drivers for change. By intentionally transforming our compensation plan, we not only reward and retain top talent, but we can also contribute to transformation to a more just society.
1. Create an intentional total compensation strategy
To build equity in your organization, you’ll need to thoughtfully provide fair compensation and inclusive benefits offerings. While not every organization can be market leaders in compensation rates, your total rewards strategy can still attract and support diverse talent. As you build your rewards strategy, start with questions like these:
What type of talent does your organization need to attract, support and retain through your compensation?
Which core values and performance outcomes could your compensation cultivate in your organization?
What is your realistic budget for investing into total employee rewards?
In addition to base compensation rates, how can you leverage budget resources (and non-monetary offerings) for meaningful, well-rounded employee rewards?
What benefits would be most impactful for your workforce, specifically underrepresented groups like BIPOC, women, LGBTQ+, neurodiverse and disabled team members (ex. generous parental leave, retirement benefits, variable compensation rewards, flexible working hours, zero interest hardship loans, or tuition reimbursement)?
Your total comp strategy usually includes: base pay, incentive pay (bonuses, profit sharing, etc.), equity, PTO, health/dental/vision insurance, 401k (with or without match) and paid parental leave. It can also include perks like professional development stipend, paid volunteer days, commuter benefits, work-from-home reimbursements, catered meals, and some of the other benefits listed above.
Before you add any investment, ask why to investigate potential bias. Who will it help? What will it achieve? Does it disproportionately benefit one group over another?
2. Define your target market
Next, define your market and how competitive you want to be against the market. If you are a small business just starting out, you may benchmark pay at the 40th percentile (which is slightly under market) and try to attract talent through a combination of base pay plus flexibility, purpose/ mission, and equity. If you are scaling and competing for in-demand talent, you should look at benchmarking pay at the 50th percentile (which is considered market) or the 60th-70th percentile (which is considered above market). This will help you make consistent decisions when you go to benchmark your positions.
When defining your market, think through:
Where do we compete for talent? Who are the competitors we either pull talent from, or lose talent to?
What size of companies do we compete with? (hint: they may be larger than your company)
What locations are we competing for talent within (cities, states or metropolitan areas)
What industries do we compete with? (hint: it may be slightly different than your industry, or you may compete for talent from different industries based on the department or function)
3. Use Reliable Market Data
After reviewing the internal strategy for compensation, it’s time to position yourself competitively (and fairly) within the market by basing decisions on actual, reliable compensation data. To do this, we recommend Payscale. Pro tip: if you’re looking into how to benchmark a new role, temporary recruiting agencies can often provide market compensation reports for specific positions from paid databases, upon request.
What compensation is competitive and fair according to market data?
What percentile does your company occupy within average market ranges? What’s the reason for that placement within market averages?
4. Develop Pay Ranges by Position or Job Grade
Now that you’re clear on your strategy, it’s time to build standardized pay ranges. To avoid perpetuating inequity, make sure your pay ranges are based on position type or job grade (the level of skill, responsibility and authority required), with well defined job requirements and skills.
When deciding ranges, base decisions on market data and consider the following:
What skills, competencies or responsibilities are highly valuable in this role?
What would it cost at market to replace this position?
How much experience is truly required for this position?
5. Conduct Standardized Wage Reviews
Next, eliminate ad hoc pay decisions. Conducting consistent wage reviews - in combination with clear performance standards - will reduce bias in pay decisions.
A recent study by the Cass School of Business in London found that although women negotiate salary just as often, they are 25% less likely to receive it than male counterparts when they ask. To avoid unconscious bias in these decisions, keep a standardized process with:
Scheduled reviews every six or twelve months
Decisions based on concrete performance indicators and responsibilities (think: behaviors & outcomes)
HR Involvement (to reduce variation based on management style differences)
6. Don’t Ask About Salary History
When you’re hiring, do not ask candidates about their previous salary history. This practice is currently illegal in certain states, as it perpetuates gender and racial pay gaps. According to new research from Boston University, salary history bans work at substantially closing both of these gaps. Instead of asking people for their pay history, ask them about their salary expectations.
Finally, equitable pay is about consistency – not stagnation. As your organization grows, be willing to grow in your commitment to equity as well. Consider how you’ll evolve your compensation strategy with your organization. We recommend scheduling annual reviews of your compensation strategy and pay ranges, where you can listen carefully to data sources and feedback loops (such as employee feedback, recruiting and retention difficulties), adapt to market changes, incorporate hard-earned learnings and commit more deeply to cultivating equity in the workplace