Informed Compensation Discussions

Do you feel a little lost in the world of compensation? You hear words coming out of someone’s mouth and you think you know what they are talking about but you’re not sure. Foundational to each discussion is understanding the terms related to the topic. While each organization might have different processes to gather information and procedures for applying the information, the terms describing compensation and related practices should be used with purpose. Below you will find a list of the most common compensation terms and processes with their customary meaning. Compensation doesn’t have to be a “black box”. Start off your next discussion a little more comfortable than you are now. Enjoy!
Annual Incentive Plan – An Annual Incentive Plan is the most common of all short-term incentive plan practices and includes a performance (merit) period of one year or less. It should complement the business strategy and be part of the overall strategy of the Total Rewards program. It is a non-discretionary award.
Benchmark Jobs – Benchmark jobs are commonly found in salary surveys and used to make pay comparisons, either internally or externally, for an organization. When selecting benchmark jobs, they should:
• Be important to your organization’s internal hierarchy,
• Represent all major job families, departments and levels, and
• Serve as an internal anchor for non-benchmark jobs.
A good goal is to match 70% of your internal jobs to the external marketplace. The more jobs that are matched, the closer the salary structure is to the external marketplace. Realistically between 50%-70% of your jobs will be found in the marketplace.
Bonus – A bonus is paid to recognize the achievements of an individual, team, department, operating unit, or a company. Payments may recognize a performance period (monthly, quarterly, semi-annual, annual) and are typically made in cash, but occasionally will be paid in equity or another form of award. A bonus may be discretionary or nondiscretionary and will have a lot to do with the laws of the state in which work is done.
Compa-Ratio – Compa-Ratio is a comparison of employee pay to the salary range midpoint.
Compensable Factors/Characteristics – Compensable factors/characteristics are used to evaluate jobs and develop a job worth hierarchy to provide fairness and equity throughout an organization. The Federal Equal Pay Act of 1963 defines the compensable factors/characteristics, and there are several states with their own set of factors/characteristics.
Compensation Benchmarking – Compensation benchmarking is best defined as the process of applying external market data to make fair and competitive compensation decisions. It may even influence the compensation strategy, policies, and practices.
Cost of Labor – The cost of labor includes all compensation, benefits, and payroll taxes paid by employers to employees and can be compared from location to location.
Cost of Living – The cost of living is tied to wages and represents the amount of money needed to maintain a certain standard of living as measured through housing, food, healthcare, and taxes and can be compared from location to location. Use cost of living data cautiously for compensation purposes as it can be much higher than the cost of labor in a location.
Grandfathering – Upon implementation of a new or revised compensation plan, grandfathering will protect the current compensation opportunity of existing employees when performing the same role in the organization and will support in minimizing employee relations issues to contribute to a successful program implementation.
Gross Up – A payment, such as a one-time award, may be grossed up so that an employee will receive the full amount even after taxes. In this instance, the company will bear that cost of the tax gross up.
Hours of Work (the math) – Assuming a regular, full-time equivalent at 40 hours per week, there are 173.33 work hours per month and 2,080 work hours per year.
Internal Equity – Internal equity is an important objective of the overall compensation program and can be accomplished when jobs are valued fairly and objectively both within a company and to the appropriate external marketplace. Employee compensation should be delivered based on fair and objective criteria (such as performance, merit, seniority, education, experience, and training) within the competitive marketplace to ensure the attainment of internal equity. Pay audits will support in the identification of internal equity issues. Several states have specific laws outlining criteria and process for internal equity.
Long-Term Incentive Plan – A long-term incentive plan is typically used to reward and recognize ongoing organizational achievements (typically ranging 2-5 years). Awards may be payable in cash or equity to the eligible management team (typically at the executive level).
Lump-Sum Merit – A one-time payment to recognize pay for performance, a lump-sum merit will not be folded into an employee’s pay. It is commonly used to recognize employees paid at the top of their salary range or as a cost savings strategy.
Market Pricing – Market pricing is a job evaluation methodology that creates a job worth hierarchy based on the “applicable market rate” for benchmark jobs in the external marketplace relevant to the business.
Market Ratio (Market Index) – Market Ratio is a comparison of employee pay to the market rate.
Merit Increase – A pay increase designed to recognize pay for performance.
Pay Transparency – Pay transparency is an approach to communicating compensation openly with employees. It typically includes the following: compensation plan documents, merit increase guidelines, market data sources, job descriptions, and employee communication for individual pay changes, including salary grade and range. Less frequently, companies might communicate other employees’ pay to all employees.
Salary Range – A salary range represents the minimum, midpoint, and maximum rates that a business is willing to pay employees performing a job. Typically, the midpoint or control point is set to provide market competitive, fair, and equitable salaries based on the competitive marketplace for a business.
Salary Range Maximum – The Salary Range Maximum is the point at which an organization would expect an employee to exceed in performance of essential responsibilities, be ready for promotion, or are highly experienced.
Salary Range Midpoint/Control Point – The Salary Range Midpoint/Control Point is the point at which an organization would expect an employee to meet essential responsibilities, be fully competent, experienced, and independent.
Salary Range Minimum – The Salary Range Minimum is the point at which an organization would expect an employee to need guidance and training to learn their essential responsibilities, grow towards proficiency, and be partially dependent on others for success.
Salary Range Midpoint Progression – The Salary Range Midpoint progression is the percent difference between midpoints.
Salary Range Spread – A salary range spread is the percent difference between the minimum and maximum.
Salary Structure Adjustment – A salary structure adjustment may be used in lieu of repricing an existing structure. In this case, a flat percentage (based on the market movement of salary structure adjustment projections) is typically applied to the midpoints of the existing salary structure to adjust them to the upcoming year. Salary structure adjustments are approximately 1% below the market movement of base salaries.