Cascade's Compensation Toolkit: How Compensation Fits Into HR

Compensation is a vital instrument used by company management to advance business needs, goals and missions, and the workforce of an organization. Compensation is directly tied to various HR programs, including:

• Recruitment, Retention, and Employee Relocation;
• Performance Appraisals;
• Training;
• Career Development and Advancement;
• Labor Relations;
• Employee Terminations; and,
• Compliance and Legislation

Recruitment, retention, and employee relocation incentives are oftentimes offered to current and newly-hired employees in situations where the benefits of offering some form of incentive (sign-on bonus, higher pay, etc.) outweigh the difficulties that may arise from losing or missing out on great people. These forms of incentives may be offered when recruiting for top talent/quality employees, retention of the organization’s best people, as well as the need to offer employee relocation assistance as needed.

Many organizations utilize performance appraisals as a tool to administer merit (performance) pay programs. For merit pay programs to be successful, performance appraisals must be accurate, employees must know that their efforts toward meeting goals are directly tied to merit pay increases, and the program administrator (HR, Managers, Supervisors, etc.) must have the ability to successfully design, implement, and most importantly, communicate their merit pay program.

Knowledge-based pay is a compensation system used to reward employees for setting goals, learning new skills, and acquiring new knowledge. Successful pay-for-knowledge plans directly relate to an organization’s ability to develop and implement organized training programs. When training is methodical, employees are able to learn the skills needed to increase their pay and train other employees. In organizations that implement pay-for-knowledge plans, oftentimes training becomes necessary rather than optional. In order for organizations to successfully implement this type of compensation system, employees must have access to the training, tools and resources needed to acquire the advanced skills and knowledge.

Through work experience, training, and/or education, an employee’s career may develop laterally or horizontally within an organization’s hierarchy. If an organization utilizes the traditional job-based pay structure, as an employee’s career develops and advances, his or her compensation will likely adjust to reflect shifting or increased responsibilities.

A collective bargaining agreement, negotiated between an organization’s executive team and the union, is used to outline the terms of employment, such as pay and work hours, specific to union employees. Throughout the collective bargaining agreement, compensation is often a key theme. Historically, unions have advocated for steady pay increases, COLAs, and seniority pay systems. Unions have more recently started to consider incentive-based pay systems that serve the interests of both employees and employers.

Two areas where compensation is closely tied to employee terminations are layoffs and retirement. In the case of involuntary layoffs, organizations have the option to provide severance pay, which is typically calculated based on years of service or position within a company and provides a number of months’ pay following the layoff.

Some organizations implement early retirement programs to reduce staff size and cut compensation costs. Early retirement programs provide incentives to encourage certain employees to retire earlier than planned. These types of incentives expedite senior employees’ retirement eligibility and offer increased retirement income. Some companies also provide continued medical benefits through their early retirement programs.

Compensation is tied to multiple employment laws, which establish boundaries for both acceptable employment practices and worker rights. Federal laws that apply to compensation practices are commonly tied to: income continuity, safety and work hours, pay discrimination, disability and family needs accommodations and prevailing wage laws.

To learn more about compensation practices or how compensation strategically fits into your HR department, please contact us!

Next month on Cascade’s Compensation Toolkit: Compensation and Compliance

Check back next month to learn about major laws that influence compensation practices and the ripple effect they may have on your organization.