A Guide to Compensation Analysis

Picture of Paulson Lan
Solution Consultant

People sometimes feel uncomfortable when the topic of compensation analysis arises. It might be because those who designed the commission scheme are scared that too much scrutiny will reveal a weakness or unnecessary complication in the structure. Or maybe it's the opposite, and the path to a golden bonus is just so unique you don't want anyone to understand it too deeply as they may run with it to another company.

If that's your experience, the good news is that it's about to change. Get ready to park the secret handshakes and whispered conversations that seem to follow discussions about compensation analysis as we put the case forward for openness and transparency.

What is Compensation Analysis?

Compensation analysis reviews the compensation – financial and non-financial – offered by a business, based on what it’s looking to achieve as an organization. Companies will have a compensation philosophy that’ll take into account issues around internal equity and external competitiveness to ensure that the salary range and its overall pay structure is going to attract, engage, and retain the talent it needs to be successful.

What is the Significance of Compensation Analysis?

Compensation analysis matters because it provides you with a structured approach to understanding the options open to you when designing your compensation practices. It also offers you a toolset to assess what your competitors are offering. By applying the insights gained from a comprehensive compensation analysis, perhaps using market data or salary surveys, you can design salary structures that’ll help you meet your corporate objectives.

Let's look at some of the points you need to consider in your compensation analysis.

Competition in the Job Market

This is probably the most significant driver in shaping a company's pay practices. In essence, it comes down to how widely available the skills and experience needed to fulfill a role are. The variables could involve education levels, technical and industry-specific skills, the ability to understand and solve problems, the ability to build relationships, and the willingness to work as part of a team – the list is endless.

The forces of demand and supply will affect the analysis too. Potential employees will benefit from enhanced benefits packages in times of rising demand. In times of employee falling demand, it becomes more of a buyer’s market to the benefit of employers.

The Importance of Accountability

The benefits of enabling employees to influence their own rewards - their accountability - are well understood in principle, although their application varies significantly by company and sector. Many roles only have a pay structure covering basic hours or offering a base salary. More sophisticated pay structures will offer bonuses to staff, based on the overall company performance. The aim here is to ensure that “all compasses point north,” offering the opportunity for everyone to feel engaged and contribute to the wider business objectives, regardless of their roles.

Accountability really comes into its own in commercial, customer-facing roles, especially sales roles, where individuals are held accountable and rewarded for their personal performance and contribution. Salespeople typically have the greatest scope to shape their rewards through closing business with customers that generates commissions and other financial rewards for quota achievement or over-achievement.

Maintaining Equity

Internal equity is also an important consideration for managers and their human resources team. They need to ensure that staff are treated equitably so that employees doing the same or similar roles receive the same or similar rewards. The fastest way to undermine the teamwork essential in any business is to reward people differently for essentially doing the same job.

Equity also has another dynamic in shaping how employees are rewarded for assuming additional responsibilities. People need to feel that the additional rewards that come with more responsibility are justified without being excessive or disproportionate.

Motivation for Performance

Employee pay is clearly the most significant incentive for most employees. In an ideal world, more pay should lead to better performance. But there comes a point where diminishing marginal returns kick in, where an additional 10% increase doesn’t yield a similar increase in performance. It reflects that people aren’t solely motivated by pay.

Options might include employee recognition programs, where exceptional performances of any kind are called out and praised. It might be additional training courses to help employees develop their skill set, or it might be the support and encouragement of staff to engage in the charities they support. Career development opportunities are also a key motivator for many, as employees pick up new skills and expertise they can take elsewhere.

Salary Comparison

As part of any compensation analysis, comparing salaries with your peer businesses matters too, but not always in ways one might expect. Referencing a direct competitor in a compensation analysis makes sense, but one issue is that companies rarely have absolutely identical competitors by and large. Companies grow at different speeds; they have distinct cultures and different priorities. These differences are reflected in compensation models.

In short, companies should be mindful of what their peers are offering. A better approach is to understand the skills and capabilities that a business will need and focus on where those skills are to be found, and factor that thinking into the compensation analysis.

Pay Equity Evaluation

While few would disagree with the idea that people should be paid the same for doing the same job, how one defines “the same job” is fraught with difficulty. Clearly, the comparison is straightforward if people on the same team do the same job. But how do you make that comparison for people who do similar jobs in other teams or other parts of the company? The idea of equity lies at the heart of the pay scales that companies use to band employee pay.

How do you systematically assess roles to understand whether they are similar within a business?

There are a few variables one can consider:

  • Responsibility for people
  • Knowledge
  • Communication skills
  • Physical demands
  • Emotional demands
  • Mental skills
  • Initiative

Attracting and Retaining Employees

A compensation analysis should also consider the need to attract and retain the right employees to assure the continued development and success of the business. Again, this analysis should recognize that people work for a range of rewards, not simply the financial ones. Clearly, the rewards should be competitive, but companies should also consider the conditions they offer as part of the overall compensation. In some cases, childcare is valuable; in others, flexible working matters too. Training packages should also be a consideration. Where the analysis highlights the need for new skills that haven’t been recruited for in the past, consider bespoke research to understand where these skills are to be found and any unique compensation requirements that might be necessary.

Conducting a Compensation Market Analysis

Recognizing the sophistication of how people assess rewards and recognition when selecting employment opportunities is merely the first step in performing your compensation analysis.

Let's look at the practicalities involved in conducting a compensation analysis:

1. Gain Access to Salary and Compensation Surveys

The first step is to understand the scale and scope of the salary and reward models in the employment market you are engaged in. Salary surveys are readily available, with HR consultancies and recruitment consultancies making them available for their clients or the wider public. These generic surveys are valuable, but they have their limitations. There may be a need for dedicated research to uncover the unique compensation issues associated with specific roles in specific sectors.

2. Assign Accountability

Assigning accountability is fundamentally an exercise in understanding the extent to which an individual can influence a commercial relationship with a prospect or customer. In some situations, especially in new companies, much of the work establishing a company’s profile, relationship, and credibility with a prospect lies heavily on the salesperson's shoulders. In other companies, the brand and reputation built up over many years may do much of the heavy lifting in building customer rapport. Companies need to understand how to balance this dynamic in their compensation analysis. In broad terms, if a salesperson assumes the lion’s share of responsibility for establishing a relationship, their rewards should be greater than those situations where the brand does more work. This isn’t a hard and fast rule but can be helpful.

3. Establish Job Classifications

Job classifications lie at the heart of the way that pay scales work. The criteria listed above can help to define the classifications in a business. One needs to strike a balance between differentiating between varying skill levels and levels of responsibility and having an overly bureaucratic process that takes time and effort to understand and negotiate.

4. Gather Information

The best way to gather the information needed to perform a compensation analysis depends on whether the roles being assessed are generic or highly specialized in scope. Generic requirements can benefit from open-source analysis, while more specialized requirements may need dedicated research from an HR consulting business.

5. Conduct an Examination

Completing a compensation analysis is much like completing any other study - consolidating the material, formatting the data to allow for meaningful comparisons, and the highlighting of the trends, themes, and insights that deliver actionable recommendations.

6. Make Pay Structure Considerations

A key outcome for this research should be to refine and enhance the pay structure in a business. The analysis may drive the inclusion of additional reward structures, whether it relates to absolute pay levels, relative pay levels, new commission levels, or new bonus structures, as well as the award of stock options, for example.

7. Ensure Equality and Transparency

Anecdotally, the average company allocates around 11 percent of revenue to earned compensation and incentive schemes. Companies can lack rules, cohesion, and equality, which may be highlighted in the compensation analysis. Pulling back the covers and shining a light directly on your compensation scheme may help your sales team understand the incentive scheme, almost regardless of any complexity, and see quickly and easily how it can work for them. By making this information available via software, dashboards, and easy-to-digest presentation interfaces, you're eliminating any confusion or doubt about commission models and bonus schemes.

8. Align the Business with the Results

Once the conclusions have been drawn up, agreed upon, and approved, the next step is to implement them. This needs to be considered carefully, as issues surrounding employment law and contract law need to be front of mind. Existing employees need to be consulted, either as a group or individually, to help them understand the process and to ensure they are kept onside. Some may find the process unsettling. Contracts may need to be changed. The employee handbook and HR policies might need to be updated too.

9. Follow the KPIs and Objectives

The last step is monitoring the plan's implementation so that as a business implements a compensation plan, it fully meets its objectives and addresses fully the needs of the business and the needs of employees.

There are a few practical considerations when setting out a compensation scheme. Use a sales performance management tool that all your sales team can get on board with and utilize. They need to understand their objectives as well as their rewards. Given sales teams have some of the most complex incentive plans in the business, automating this process frees up their teams as well as those in HR and sales operations.

Implementing Your Compensation Plan

Having spent considerable time, energy, and money on designing your ideal compensation plan, careful consideration needs to be in place to have an infrastructure that ensures it’s easy to manage and delivers the results you need.

Here are some issues to think about as you design the optimal incentive compensation management solution for your business.

The first step is to consolidate all your incentive models into one unified platform. Your compensation analysis will likely highlight the need for multiple compensation models in your business. These will depend on the number and the complexity of the roles identified in the business. Utilizing a centralized compensation management system makes managing this complexity much easier. It also provides a platform where people can access the information they need from anywhere and with any device. This approach offers self-service capabilities that help staff understand their own incentive plan through easy-to-use tools and measure their progress against their personal incentive plan.

Achieving an Attainable But Fair Commission Scheme

There are some sales-specific enhancements available to incentive compensation management environments that can help to support the motivation and performance of the sales team. They can also help ensure that the incentive plan is fully aligned with the direction of the business.

Quota and territory planning tools are an inherent part of a compensation model for salespeople. Designing the optimal territory based on revenue intelligence capabilities allows a company to optimize the coverage of its target market based on an informed and sophisticated analysis of the distribution of the target audience and where demand is to be found.

Optimizing territory allocation drives the optimal quota allocation, which best supports the direction of the business. This drives compensation design and management, ultimately feeding into the compensation analysis and design process.

Getting your compensation scheme exactly right is a combination of math, science, and psychology. Overall profits and the achievement of your business objectives are heavily reliant on the performance and enthusiasm of your sales team. The rewards need to match the effort involved. Rather than scrabbling for a compensation spreadsheet or relying on hearsay, the only sure-fire route to greater success and richer compensation payouts is by implementing an attainable but fair commission scheme that’s watertight against the most robust compensation analysis.

Learn more about incentive compensation best practices and how to evolve your strategy to keep up with the rapid pace of change by downloading our eBook, Are You Evolving Your Comp Plans as Often as You Should?

Ready to get started right away?  Book a demo to see how Varicent can help.

Tags: Incentive Compensation

Picture of Paulson Lan
Solution Consultant

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