It is important for compensation professionals to understand how their company approaches compensation and what it entails for their organization. With the cost of labor as one of the biggest expenses for any business, accounting for up to 70% of total business expenses, it is essential to conduct compensation analyses. Although the compensation analysis process can be complex, it is necessary to ensure fair compensation practices that will contribute to your overall compensation and employee retention strategy.
What Is Compensation Analysis?
A compensation analysis is a systematic evaluation of an organization’s pay and benefits framework. It involves examining several factors, such as industry benchmarks, job roles, experience levels, and geographical considerations, to determine the competitiveness and fairness of employee compensation packages. By conducting a comprehensive compensation analysis, you can ensure that compensation practices align with internal and external market standards, comply with regulatory requirements, and support your talent acquisition and retention goals.
Why Is a Compensation Analysis Important?
A comprehensive compensation analysis enables you to ensure that your organization is financially responsible to your employees and overall business operation. A compensation analysis can contribute to the following goals:
- Ensure Pay Equity and Fairness: A well-executed compensation analysis helps organizations ensure pay equity among employees based on their skills, experience, and contributions. This helps identify any disparities or inequities in pay across different roles, departments, or demographic groups, allowing organizations to address any potential issues of discrimination or bias.
- Ensure Legal Compliance: When you review your compensation analysis, this is your chance to review any updates on pay laws. Review federal laws and regulations, such as the Fair Labor Standards Act (FLSA), the Employee Retirement Income Security Act (ERISA), and the Equal Pay Act, to lay the groundwork for fair pay. Along with federal laws, do not overlook state-level laws, which can introduce additional requirements that need to be incorporated into your policies and compensation practices. Our Assessor Platform can help you stay on top of changing minimum wage and FLSA requirements with alerts that ensure that you are always legally compliant.
- Cost Optimization: Conducting a compensation analysis allows organizations to identify inefficiencies in their pay structures and make adjustments to optimize costs. A compensation analysis report can ensure that compensation aligns with market rates and employee performance, helping companies allocate their resources more effectively and achieve better return on employee investment.
- Improved Employee Satisfaction: When employees feel that they are fairly compensated for their contributions, they are more likely to be satisfied with their jobs and remain loyal to the organization. A comprehensive compensation analysis helps identify areas for improvement, leading to higher employee satisfaction and retention rates.
Benefits of Conducting Compensation Analysis
Performing a compensation analysis can benefit your organization in several ways:
- Data-Driven Insights: Compensation analysis provides data-driven insights into market trends, competitor practices, and internal pay disparities. This enables informed decision-making and ensures that compensation strategies are aligned with organizational goals.
- Salary Benchmarking: Compensation analysis helps you understand how competitive an organization’s pay structure is compared to industry standards and competitors. By offering competitive salaries and benefits, companies can attract and retain top talent. Fair compensation can also boost employee morale, motivation, and job satisfaction, leading to increased productivity and lower turnover rates.
- Strategic Decision-Making: Compensation analysis provides valuable insights that inform strategic decision-making related to workforce planning, budget allocation, and performance management. By understanding how compensation impacts employee performance and organizational outcomes, companies can make more informed decisions that drive business success.
How to Do a Compensation Analysis
These steps are critical in the process of conducting a compensation analysis:
1. Define Objectives and Scope: Before conducting a compensation analysis, clearly define the objectives and scope of the study. Determine what aspects of compensation you will be analyzing and the specific goals you aim to achieve. Different goals require varying approaches that contribute to the overall compensation analysis. For example, if you want to understand the cost of labor per employee, you may want to conduct a job analysis to provide an accurate picture of your organization’s job hierarchy and compensation allocation. On the other hand, if you are looking to understand why employees leave your organization, conduct employee engagement surveys.
2. Gather Current Data: Collect relevant data from internal sources, such as HR records and payroll systems, and external sources, such as industry surveys and compensation databases. Ensure that the data are accurate, up-to-date, and representative of your organization’s workforce and industry. A few important sources of data are defined below.
| Data | Definition |
| Job Descriptions | It is important to have an up-to-date job description for every job within the organization. It should explain the job’s placement within the organization and outline the essential duties and typical functions performed by the employee. |
| Compensation Policies | This includes information on compensation policies that are followed when conducting a compensation analysis. Also, gather data from the employees’ point of view in understanding these policies, such as the employee handbook. |
| Salary Benchmark | Gather data that includes pay structures for all employees that compare internal pay data to the external market. |
| Employee Information | Organize your employee information, such as location, working hours, work experience, and performance. |
3. Job Evaluation: Evaluate job roles within your organization to establish a systematic framework for comparing positions based on relevant factors, such as skill requirements, responsibilities, and market demand. Use job evaluation methodologies, such as job grading or point-factor analysis, to assign relative values to distinct roles.
4. Salary Benchmarking: Compare your organization’s compensation practices against industry benchmarks and competitor data to assess competitiveness and identify areas for improvement. Utilize compensation surveys, market reports, and online databases to gather benchmarking data relevant to your industry and geographical location. For a more in-depth analysis, consider using ERI’s compensation planning software to streamline your compensation strategy, get data on the market, and customize compensation based on your needs.
5. Analysis and Interpretation: Analyze the data collected to identify trends, patterns, and disparities in compensation across various job roles, departments, and demographic groups. Look for outliers or anomalies that may indicate areas where adjustments are needed to ensure fairness and competitiveness.
6. Develop Recommendations: Based on the findings of your analysis, develop actionable recommendations for adjusting compensation practices to align with market trends, address internal inequities, and support organizational objectives. Consider myriad factors, such as budget constraints, employee preferences, and regulatory requirements, when formulating recommendations.
7. Communicate Results: Decide how you will communicate your analysis and recommendations to key stakeholders, managers, and employees. Consider including only necessary information, such as past challenges, the current situation, and improvement recommendations. No matter how you decide to present your findings, whether it is through a PowerPoint presentation, a Word document, or an Excel spreadsheet, make sure that the results are easy for others to understand.
8. Implement and Monitor: Implement the recommended changes to your compensation practices and monitor their impact over time. Track key metrics, such as employee turnover rates, satisfaction scores, and recruitment outcomes, to evaluate the effectiveness of your compensation strategies and make further adjustments as needed.
Why Use ERI?
The purpose of conducting a compensation analysis is to get data-driven insights into your compensation strategy that will help HR professionals make better business decisions. You can conduct your analysis using Excel; however, this is a laborious manual process and is prone to human error. Instead, use our Assessor Platform and compensation analysis tools to properly set wages, determine the cost of labor, and develop lasting pay structures. You can streamline your compensation management, determine competitive salary levels, compare employee salaries with market benchmarks, and more with instant access to employer-reported compensation survey data online. With reliable and current data, you can get better insight into your compensation strategy and make cost-effective decisions to retain top talent.
