Avoiding Costly Pitfalls: The Top 5 Mistakes to Avoid in Employee Compensation

January 3, 2024
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Avoiding Costly Pitfalls: The Top 5 Mistakes to Avoid in Employee Compensation

Employees are your most valuable asset and their compensation likely makes up a large part of your budget. Despite this, many companies make mistakes when it comes to compensating their employees. 

These mistakes can lead to your team feeling disengaged and unmotivated. Leave these issues unresolved, and your employees may start to look for another role elsewhere. You’ll then be left having to replace employees—which is estimated to cost a minimum of six to nine months of their salary. 

To avoid making these costly pitfalls, we’ve rounded up the top five employee compensation mistakes, plus how to fix them. 

Top 5 employee compensation mistakes (and how to fix them)

#1 Lack of effective communication 

Good communication is the cornerstone of any compensation decisions. If employees don’t understand how their salaries and benefits are calculated, they may feel they’re not being compensated fairly, even if your rates are above the market average. These days, employees also feel more comfortable discussing their salaries, which could lead to them discovering pay inequity issues like the gender pay gap.   

How to fix it: Create a compensation communication plan that helps keep employees informed of your compensation strategy. A clear plan like this helps you maintain regular, open conversations around salaries, which can help boost employee retention and engagement. 

#2 Not using benchmarking data 

How do you calculate salaries at your company? If your compensation strategy is based on a gut-feeling of what’s average for your industry, then that’s not fair on your employees. This kind of ad-hoc approach can also end up costing you more money, and helps perpetuate pay inequity. And with only 34% of employees feeling that their pay is fair, this can lead to higher rates of employee attrition as your team leaves for better pay at a more equitable company.      

How to fix it: To attract and retain the best talent, the strongest compensation strategies rely on the use of cold, hard data. Compensation benchmarking tools are an extremely efficient way to set competitive salaries based on real-time market data for your specific industry. Compensation benchmarks can also help improve employee satisfaction and trust, because it’s easy to demonstrate exactly how you determine each employee’s pay.    

#3 No overall compensation philosophy

You might have a compensation policy, but do you have a compensation philosophy? While a policy helps each company structure their pay, rewards, and benefits, a compensation philosophy is similar to a mission statement, but specifically focused on compensation. Without this direction, it can be hard for employees to understand your company culture, which is a vital way to maintain engagement and retention.    

How to fix it: Company founders, leadership and people teams should work together to develop a clear compensation philosophy that ties your pay policies to company values and culture. Consider factors that guide your decisions, for example trust, transparency, ownership, and fairness. Read our full guide on setting up a compensation philosophy for more inspiration.   

#4 Not prioritising pay equity 

Pay equity needs to be at the forefront of any compensation decisions, especially as employees become more comfortable discussing their individual salaries. The EU pay transparency directive will also push employers to report up-to-date and accurate pay information, and failing to meet these obligations can be a very expensive mistake.     

How to fix it: One of the most effective ways to ensure pay equity is to prioritise pay transparency. Our research found that transparent companies have an internal pay gap that’s 41% lower than their non-transparent counterparts. Discover more in our full report on the impact of  pay transparency

#5 No salary increase plan 

Without a structured plan for performance reviews and salary increases, some employees may get a raise every year, simply because they ask for it. Other employees could work as hard if not harder for the same salary, without asking for an increase. This can create tension as personal bias may mean employees are being treated differently during their salary reviews. 

How to fix it: Leaders should discuss the quantitative and qualitative metrics that any salary increases should be compared against. Developing a standardised process for annual salary reviews means employee performance can be assessed fairly, and salary reviews can be implemented without allowing bias to affect the outcomes. Fair salary reviews also help you remain competitive, especially if you use a benchmarking tool to uncover insights around the average market rates for your industry.     

Getting it right: your compensation checklist 

To avoid making costly pitfalls when designing your employee compensation strategies, use our checklist to make sure you’re on the right track:

  • Develop a compensation communication plan 
  • Use benchmarking data to inform your decisions 
  • Create a transparent compensation policy
  • Write a compensation philosophy 
  • Advertise salary ranges and grids 
  • Aim for full transparency around individual salaries 
  • Develop a clear and equitable salary increase plan 
  • Ask for regular employee feedback 
  • Regularly reassess salaries throughout the year
  • Ensure all employees are treated equally 

How did you do? If you didn’t hit all ten, we’re here to help. Our all-in-one platform can help you develop the right strategies for an employee compensation strategy that maximises your budget while also speaking to the people that really matter: your team.   

That’s it, no more excuses. It’s time to make smarter compensation decisions

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