Employee Pay in Focus: Transactional vs Strategic Pay Practices
Differences abound between transactional and strategic human resources, but even if the distinctions are clear to HR generalists, these terms get a little fuzzy when it comes to employee pay matters. Nonetheless, it’s important to understand the distinctions as these can be important to establishing the right pay practices and policies to keep your organization market-competitive. Let’s look at some critical differences between transactional and strategic approaches to employee pay, and answer some frequently asked questions that can help brings this subject into focus:
Characteristics of Transactional Employee Pay
Transactional employee pay practices tend to be short-term (or, for that matter, often shortsighted). They address situations but don’t address the “big picture.” They tend to be stop-gap in nature; interim solutions that might still need permanent strategic solutions down the road.
Here are some common employee pay situations that are short-term and transactional in nature, rather than long-term and strategic:
- Hiring new employees just above what they are being paid with their current employer
- Bringing new employees into the organization at a pay rate above existing employees to make sure the position gets filled
- Awarding merit increases without performing any proactive analysis just because they fit in budget
- Utilizing loose descriptions of job functions
- Using free salary data or letting employees drive the pay narrative with potentially misleading or inaccurate data from the internet
Characteristics of Strategic Employee Pay
Strategic employee pay practices tend to be longer-term solutions. They take the big picture into account and take the long view toward continuing marketplace competitiveness.
Here are some common employee pay situations that are longer-term and strategic in nature, rather than short-term and transactional:
- Placing new employees in a market-validated pay range and comparing their history to others in the same or similar position for proper pay placement
- Evaluating and adjusting pay for current employees as needed when new hires must be brought in at higher rates
- Conducting a discrimination analysis before approving merit increases and address related issues proactively
- Utilizing job descriptions with clear responsibilities and standards for minimum as well as desired experience levels and education requirements
- Securing third party published and scrubbed employer data or using a compensation consultant to secure salary data
Answering Frequently Asked Questions to Clarify Transactional vs Strategic Employee Pay Practices
How can we bring new hires in using the prevailing market range when current employees are below market?
First, think of your pay range in thirds: The lowest third of the pay range would apply to new and untested employees with little to no experience. The middle level would apply to fully proficient employees with several years of experience. The upper third is for seasoned employees with sustained performance over many years as well as a lot of experience.
Obviously, you’ll need to have key information to properly place new employees into the appropriate pay range. For example, how much relevant experience will they bring to the job? Three years of experience? Four? None? You’ll then need to consider your current employees and align the new employee’s pay with other similarly situated employees. For instance, if a current employee has been in the job 4 years and came to you with no previous experience and the new employee brings 4 years of prior experience, you should pay these employees approximately the same.
If you need to bring that new employee in higher than the existing employee because the market demands it, keep in mind when your merit awards will occur. If they are just a few months away, the current employee’s pay may exceed the new employee’s pay with their merit increase. If you just awarded merit increases, you may need to increase the existing employee’s pay to avoid creating discriminatory pay practices. You may also have to budget an increase for current employees and then execute the pay increases as soon as possible. You could also offer the new employee a sign-on bonus payable in various payments to keep the regular rates of current and new employees aligned.
This leads us to the next question:
How can we realign existing compensation to market levels with minimal impact to financials?
Tough question. It helps to budget for market-related increases each year. If that hasn’t been your practice and the pay ranges have fallen behind, you might provide increases every six months until you can get employee pay where needed. For employees below pay-range minimums, you can give merit increases first and then make a market adjustment if needed to help them reach the new minimum. Finally, you can use bonus programs, known as “variable pay,” in addition to base pay. Variable pay benchmarks must be re-earned each measurement period based on results. This enables you to hold merit increases in check; this can be important because merit increases permanently increase salary levels as well as benefits associated with base pay, such as life insurance, short-term disability, long-term disability, and sometimes retirement plans. Bonuses, on the other hand, are single pay-outs that do not normally increase base pay levels and related benefit costs for benefits (unless otherwise included per your benefit plan documents). Be sure to check your plan documents to clearly understand the definition of compensation before using bonus plans.
Which naturally begs this question:
Why is a properly designed strategic pay program important to an organization?
Among the many reasons are that a well-designed strategic employee pay program:
- Provides appropriate pay ranges for recruitment
- Promotes accurate job descriptions
- Provides a basis for determining the external value of jobs to market
- Provides baselines for reviewing employee performance and rewarding desired behaviors
- Ensures costs are maintained and managed appropriately
- Helps reduce turnover through improved employee morale and engagement when pay is not a dissatisfier and there are no pay equity issues
The Bottom Line:
It’s important to strategically plan your employee pay programs so you can attract and retain your top talent. Recognize that your employees are an investment and not an expense. The time and money it takes to provide strategic pay programs will pay dividends through your ability to hire, motivate, and retain engaged employees who drive strong business results.
About Total Reward Solutions — A BEST Strategic Partner:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees, and retain top performers. We can partner with you on a project basis, on retainer, or as your total outsourced solutions provider for compensation services.
To learn more about how to design, implement, and manage strategic employee pay programs, contact us today at 317.589.8529.