How to Determine Compensation Levels That Are Sustainable for Employers and Adequate for Employees

Compensation levels are an important metric as they determine employee pay and benefits. When compensation is competitive, employees feel valued and are likely to stay, reducing turnover costs and maintaining a skilled workforce. Meanwhile, low compensation can lead to dissatisfaction and higher turnover, which increases recruitment and training costs.

Some turnover is inevitable as employees may leave for reasons beyond your control. But knowing how to determine, monitor, and adjust your salary levels is the first step toward attracting and retaining top talent, ensuring that your employees are motivated and engaged in their work.

What are compensation levels?

Compensation levels refer to the estimated value of the rewards an employee receives in exchange for their work based on various factors such as employee's role, experience, market conditions, and the organization's compensation strategy.

These levels are often shown as a range, not a single number. This range recognizes that an employee's value in a role can be influenced by their experience, education, and performance. Employers use surveys, benchmarks, and job evaluation systems to set these ranges and make sure they are competitive.

What is the purpose of compensation level?

The main goal of salary levels is to create a fair and strategic system for paying employees. This system considers different factors to achieve multiple goals for the company and its employees.

Benefits of determining compensation levels

Determining salary levels isn't just a one-way street; it's a strategic process that can benefit both employers and employees. Here are some key advantages:

For employers

• Attracting top talent. Offering competitive pay helps you hire the best people for your team.

• Retention. Fair pay and benefits keep your employees happy and less likely to leave.

• Market competitiveness. Keeping an eye on what other companies are paying helps you stay competitive in hiring.

• Budgeting and fairness. A clear pay structure helps you plan your budget and ensures everyone is paid fairly.

For employees

• Fair compensation. Knowing you're paid fairly for your work makes you feel good about your job.

• Career growth. A good pay structure includes ways to earn more as you gain skills and experience.

• Job satisfaction. Fair pay and benefits lead to happier employees who are more engaged in their work.

Key factors for determining compensation levels

Determining salary levels involves considering key factors to ensure fair, competitive pay aligned with organizational goals. Here are some of them:

Market rate

Knowing what other companies pay for similar roles in your industry and location is critical for setting competitive salary levels that attract top talent.

Job title and responsibilities

The specific roles and responsibilities within your organization are essential in determining compensation levels. Roles with higher levels of responsibility or specialized skills typically command higher pay.

Experience and education

An employee's experience and education are important for determining their compensation level. Those with more experience or higher education often earn more because of their skills and qualifications.

Employee performance

Salary levels should reflect the performance of top employees to maintain their motivation and retention. Performance reviews can be used to determine salary raises or bonuses for those who exceed expectations.

Cost of living

The cost of living in the area where an employee works is also a factor in determining their compensation level. Employees in areas with a higher cost of living may need higher salaries to live comfortably.

Company’s ability to pay

The company's financial health is a critical consideration when setting salary levels. While it's important to offer competitive salaries, they must also be sustainable for the organization.

Worker’s value to the organization

An employee's value to the organization is important in determining salary levels. Those who contribute significantly to the company's success may warrant higher pay.

External factors

External factors such as industry trends, economic conditions, and changes in labor laws can also impact compensation levels. It's important to stay updated on these factors to make informed decisions about compensation.

Challenges in determining compensation levels in the workplace

Setting fair and competitive salary levels is a constant challenge for organizations. Here are the key challenges HR departments face:

Balancing budget and competitiveness

This challenge involves balancing financial resources with the need for competitive compensation levels. It's vital to attract and retain talent while maintaining financial health. This requires careful budget planning and considering factors like revenue projections, cost of living adjustments, and industry benchmarks.

Finding good reliable market data

Getting reliable market data for competitive compensation levels can be challenging due to factors like data source reliability, limited access to industry-specific data, and the dynamic job market. HR departments often rely on surveys, reports, and benchmarking studies, but ensuring data accuracy and relevance can be tricky.

Ensuring fairness and equity

Fairness and equity in compensation are important for employee satisfaction and legal compliance. Achieving this balance can be challenging as well, especially in diverse organizations. Job complexity, skill demand, and internal pay structures all influence fair compensation levels.

Keeping up with the market

The job market is always changing with new roles and technology. To stay competitive, organizations must regularly update their compensation by staying current with market trends, conducting salary surveys, and adjusting compensation plans.

Subjective factors

Deciding on compensation levels involves subjective judgments, like assessing skill or experience value. This can lead to bias and fairness issues. HR should establish clear rules to reduce bias and maintain consistency.

Communication and transparency

Clear communication and transparency in pay decisions build trust with employees. However, this can be tricky in large organizations with complex pay structures. HR needs clear strategies to ensure employees understand their compensation reasons.

The good news is that most of these challenges are already addressed by Salary.com's Compensation Software. The tool offers unique features, providing a comprehensive compensation management solution with 100% employer-reported surveys, market pay data, and job content.

How to determine compensation levels that are fair for both employers and employees

Setting fair and sustainable compensation levels requires balancing what attracts employees with what's financially responsible for the employer. Here's how to do it:

1. Step 1: Research market rates

   To determine fair salary levels, start by researching the going rates for similar jobs in your industry and area. Use resources like salary surveys, industry reports, and job listings. This knowledge will help you offer competitive salaries that appeal to and keep top talent.

   Compensation Software gives you access to a vast database of HR-reported market data. It includes information on over 15,000 job titles across 225 industries in the US. This data is updated monthly by Certified Compensation Professionals, so you can stay current without any extra effort.

2. Step 2: Consider internal factors

   Assess your company's finances, including budget and overall compensation approach. Factor in financial goals, current pay system, and fairness within the organization. Balancing these with market rates ensures fair and sustainable compensation.

   The tool's Analytics feature helps you make confident compensation decisions. You can create, edit, and share reports analyzing compensation across your organization. It also helps you assess internal pay differences by employee group and take corrective action when necessary.

3. Step 3: Account for experience and education

   Consider the candidate's background when determining salary levels. Those with more experience or education might deserve higher salaries. Use job evaluation methods to determine the worth of different roles based on these factors.

4. Step 4: Factor in total rewards

   Consider the total rewards package, including benefits, bonuses, and other perks, when determining salary levels. A complete package can improve the overall compensation and appeal to job seekers.

5. Step 5: Be transparent and communicate

   Lastly, be open about how you decide on pay and talk openly with employees. Clear communication about what affects pay can create trust and ensure employees feel valued and fairly paid.

   You can create a Total Compensation Statement to show an employee's total pay, which demonstrates your company's commitment to transparency. The tool's customizable dashboard gives you quick access to the data you need.

Determining fair compensation levels is important for attracting and retaining talent and ensuring financial stability. It involves various steps to achieve this goal. Salary.com's Compensation Software can help by providing accurate data and analytics, simplifying decision-making for your organization.