5 Signs You Need to Conduct a Compensation Analysis

If you’re reading this blog, there’s a good chance you’ve thought carefully about your compensation structure and processes. But be honest: when was the last time you took a step back and reassessed whether your strategy is still working for your organisation? 

Your compensation strategy should not be a static document that’s created once and then set in stone forever. Instead, it needs to be constantly evolving to meet the needs of your business and your employees. 

In this article, we’ll share five signs that it could be time to run a compensation analysis — plus a quick step-by-step guide to help you navigate the process. 

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What is a compensation analysis? 

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A compensation analysis is an evaluation of how your organisation compensates its employees. It involves reviewing key components of compensation like salaries, bonuses, benefits and equity to ensure they’re both externally competitive and internally fair and equitable. 

Many companies systematically conduct compensation analyses every few years. If you haven’t revisited your compensation strategy in a while, a compensation analysis could help you ensure it’s still working as intended.

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How to know when a compensation analysis is needed: 5 signs to look out for 

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There's no one right time to conduct a compensation analysis. However, there are certain signs that could indicate it’s time to take a closer look at your strategy. Here are a few key things to watch out for: 

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1. High voluntary turnover 

If your compensation isn’t keeping pace with what employees are worth, they’re unlikely to stick around for long. And without regular reviews, you could easily end up underpaying employees without even realising it. An increase in voluntary turnover could be a clear signal that your compensation strategy needs a refresh. 

2. Problems with performance 

If you’re seeing sudden problems with performance and productivity, it could be a sign that your employees are feeling underappreciated — and your compensation strategy could be to blame. Similarly, employees are less likely to be motivated to come to work if they feel their pay is unfair. Increased absences could be another sign that it’s time to reassess your compensation. 

3. Struggles with talent attraction 

What was a competitive salary a year ago may no longer be enough to attract top talent. The market changes quickly, and if you’re not regularly updating your offers, you might be falling behind. Problems with talent attraction or decreased offer acceptance rates are clear signs that your compensation strategy might need an update. 

4. Confusion about compensation 

Compensation is a powerful tool for incentivising certain actions or behaviours — but only if employees understand how it works. If your employees are confused about how their pay is determined, it could be time to rethink your compensation strategy. Of course, transparency levels vary from one organisation to another, but ensuring employees understand at least the key factors behind their pay can make for a more effective approach to compensation.

5. Negative employee feedback 

One of the biggest signs that your compensation strategy isn’t working as it should? Your employees are complaining about it. This can happen in various ways: for example, you might notice more employees citing pay as their reason for leaving in your exit interviews. Or, managers may simply become aware of increased grumbling about pay and benefits among their reports. Whatever form it takes, negative feedback from employees is a strong indicator that a compensation analysis is overdue.

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Other factors impacting compensation 

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While it’s important to look out for internal signs that your compensation strategy could use a rethink, there are also many external factors at play. Here are a few other things that could impact your compensation and mean a compensation analysis is necessary:

• Organisational changes: As an organisation grows and changes over time, its compensation strategy needs to change with it. If you’ve experienced rapid growth or significant structural changes, your old systems and processes may no longer be fit for purpose.

• Market shifts: In fast-moving industries, market rates can change quickly. And, if you're not regularly benchmarking salaries, you’ll soon end up underpaying employees. Paying attention to how other companies in your industry are handling compensation can help you to stay competitive.

• New competitors: A new player in your market could represent a retention risk for your employees. Regularly adjusting your compensation strategy to make sure your salaries are competitive can help prevent employees from jumping ship.

• Regulatory changes: Companies often need to adjust their pay practices and policies to comply with new regulations. For example, the EU pay transparency directive will force many employers across Europe to revise their policies. Keeping an eye on the latest regulatory updates is key to ensuring compliance.

• Evolving employee expectations: Today’s employees have different expectations from work than those of ten or twenty years ago. Employers that want to continue to attract and retain talent need to ensure their compensation strategy is aligned with those expectations.

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How to conduct a compensation analysis: a step-by-step guide

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There’s no one-size-fits-all approach to compensation analysis, because the exact process depends on what exactly you want to evaluate. To give you an idea of what the process might look like in your company, here are the basic steps to follow:

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1. Establish your goals

The first step in conducting a compensation analysis is to clearly define what you want to achieve. For example, you may want to figure out how you can better compete for talent in a tight market, which probably means conducting an in-depth salary benchmarking exercise. 

If retention is your issue, a retention analysis can help you identify why employees are leaving. Or, if you’ve spotted internal pay discrepancies you can’t explain, a pay equity audit might be on the cards. In reality, it’s likely that you’ll need to conduct a few different analyses to get a full picture of compensation in your organisation. 

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2. Gather internal and external data

Next, you’ll need to gather all relevant data on your current compensation systems and processes. You can start by reviewing your organisation’s compensation philosophy (if you have one). Creating or updating detailed job descriptions for every role is also crucial.

If you want to assess your salaries for external competitiveness, you’ll also need a reliable source of market salary data. There are several options available here: you could rely on employee-submitted data from sites like Glassdoor, purchase a salary survey or use a tool like Figures for accurate, up-to-date data. 

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3. Make calculations 

The next step is the most important and the most complex: performing the analysis itself. This will look different depending on the types of analysis you’re conducting. But whatever your situation, you’ll need to choose the right tools to make your calculations. 

For small businesses, the best tool might be a simple Excel spreadsheet, which will allow you to do simple calculations with no need to invest in expensive software. However, this is a highly manual process that’s prone to human error. Larger organisations or those with more complex needs may need to use dedicated compensation analysis software. 

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4. Address changes 

The whole point of a compensation analysis is to uncover any problems with your compensation strategy. That means the next obvious step is to make changes to account for any issues you’ve discovered. 

For example, if internal pay equity is a problem, you might need to correct certain employees’ salaries to bring them in line with their colleagues. If you discover you’re underpaying for certain roles compared with the market, adjusting your strategy will help you to stay competitive and retain talent for longer. 

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5. Communicate the results 

The final step in the process is to communicate the results to the relevant stakeholders. The level of transparency you choose to offer depends on your organisation's existing policies. However, it’s generally a good idea to provide employees with some context for the analysis and an overview of the insights you’ve discovered. 

In most organisations, managers are responsible for sharing company updates and responding to queries from employees. That means you might need to provide some additional training to managers to ensure they feel confident discussing any changes with their teams. 

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Keeping compensation effective and fair 

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The exact process of conducting a compensation analysis is different for every organisation. And the signs that one is needed can vary as well. Some companies choose to systematically perform a compensation analysis every few years to keep everything running smoothly, while others keep a close eye on key indicators to assess whether a full analysis is needed. 

The important thing to remember is that your compensation strategy can and should evolve over time. This ensures your employees will always be paid fairly and competitively — helping you to attract the best people and keep them around for longer. 

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