Employee Compensation 101: A Guide for Managers

As a manager, you know that you can have a profound impact on your direct reports.

Not only is it your job to guide, support and develop them, but you’re also their primary source of information when it comes to company decisions. And in most organisations, that includes decisions about pay.

But many managers don’t feel equipped to talk confidently about pay, because they’re not familiar with the ins and outs of their organisation’s compensation structure. 

And there’s a good reason for that: compensation can get pretty complicated. 

That’s why we decided to put together this article, which will explain everything you need to know to have constructive, positive compensation conversations with your team — plus how using Figures can make your life easier. 

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Key compensation concepts 

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Ready? Let’s jump in with some key concepts in the world of compensation that you need to know about. 

Total rewards/total compensation

Total rewards (or total compensation) is the sum total of all of the different elements of an employee’s compensation package. Depending on your company, this might be made up of: 

• Fixed salary: This is the amount employees are paid every year, regardless of their performance or achievement of goals. 

• Variable pay: This is any additional pay that’s contingent on meeting certain targets or performing to a high standard. This includes things like commissions and individual or group bonuses. 

• Benefits: These are non-financial rewards that form part of an employee’s total compensation package. They’re usually laid out in the employee’s contract and may include things like healthcare, paid time off, employee discounts and professional development budgets. 

• Equity: This is when employees are given a stake in the company in the form of stocks or stock options. Equity can get pretty complicated, but it’s a valuable way of encouraging employees to work towards the company’s long-term success. 

• Perks: These are nice-to-have extras like company cars, gym memberships or free lunches. They’re similar to benefits, though they tend to be things that the employee wouldn’t necessarily pay for themselves. 

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Job levelling 

A job levelling framework is a structured tool that organisations use to outline their expectations for each role, at each level of execution. 

Levels look different at different organisations. At Figures, for example, we have eight levels, which go from junior all the way up to C-Level.

Job levelling is an important concept in the world of compensation, because many companies (including Figures) use job levels to map out their salary bands (more on this in a moment). 

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Market positioning 

Market positioning refers to where a company stands in terms of employee compensation compared to the broader market. 

For example, some companies aim to pay employees at the 50th percentile — in other words, right in the middle compared to others in the market. Others shoot for a higher spot, like the 75th or 90th percentile. While this is (obviously) more costly, it can help to attract and retain top talent. 

As a manager, understanding your company’s desired market positioning is key, because it enables you to confidently handle salary negotiations with new hires and make informed decisions about pay increases. 

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Salary bands 

Salary bands (also known as pay bands) outline the range a company is willing to pay for a specific job at a certain level. 

For example, the salary band for junior marketing assistants might start at €25,000 and go up to €32,000. At the intermediate level, the band might stretch from €30,000 to €37,000. 

Where employees sit within those bands depends on various factors, including their performance ratings, how long they’ve been at the company and more. 

Using salary bands gives employers a structured framework they can use to make decisions about pay. They also help employees to understand how much they could potentially earn while remaining at the same job level. Ultimately, salary bands can help organisations to drive pay equity, improve budget planning and promote pay transparency. 

As a manager, you might not be directly involved in creating your organisation’s salary bands. But you still need to understand how they’re structured so that you can accurately and confidently explain this to your team. 

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Compensation at your organisation 

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Every business is different — and we can’t tell you exactly what your organisation’s compensation structure looks like. But we can tell you where to look for this information. 

Below, we’ll discuss three important sources of information that managers should use to familiarise themselves with their organisation’s compensation structure and systems.

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1. Your compensation philosophy 

Your company’s compensation philosophy is a high-level statement of its overall approach to compensation. Its aim is to answer two main questions: 

1. What are your organisation’s goals in terms of compensation? 
2. Why does the organisation believe in those goals? 

As a manager, it’s important to be familiar with your company’s compensation philosophy, because it should guide all decisions and conversations about pay. 

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2. Your compensation policy 

Your company’s compensation policy is the practical application of your compensation philosophy. This is where your HR or compensation team should go into detail about your organisation’s strategy for compensation and how the organisation makes decisions about pay. 

This document includes things like the balance of fixed vs. variable pay, who gets access to what benefits and the criteria you use to define salaries for new hires. It should also talk about your target market positioning and how your organisation defines its salary bands. 

Basically, your compensation policy is where you should look if one of your team members has a question about compensation that you don’t know the answer to. 

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3. Your compensation review process

Lastly, managers should understand the specific process that their organisation has in place for running compensation reviews. 

The purpose of a compensation review is to assess your salary structure for any inequities, and award raises where they’re due. Usually, these reviews happen once a year, although many organisations (including Figures) now run them more often. 

Different companies take different criteria into account during the salary review process. But it typically involves considering things like: 

• Performance ratings 
• Market data 
• Inflation 

As a manager, you need to understand how this process works at your organisation for two reasons. 

First, managers are often asked for their input on salary decisions during the compensation review process. While there may be some room for manual overwrites, it’s important that you understand the rationale behind the decisions that have already been made so you know when adjustments are appropriate. 

Second, managers are usually responsible for communicating the results of the compensation review to their reports. That means you need to understand how decisions are made so you can properly explain them to your team. 

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Communicating with employees about pay 

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The ability to have meaningful, productive and informative conversations about pay is an important skill for a manager. When they’re done right, these conversations help employees to understand how they’re paid, and the rationale behind any decisions. 

This builds trust in you as a manager, and by extension, the organisation as a whole. Over time, this can lead to improved employee morale, engagement and retention. 

But here’s the thing: money is a sensitive subject — and these conversations don’t come naturally to everyone. If you struggle with communicating effectively about compensation, here are a few tips: 

• Treat compensation conversations sensitively: While compensation might be a business decision for an organisation, it’s always personal to employees. Plus, cultural attitudes make discussing pay difficult for a lot of people — especially if they’re asking for a raise or disputing a decision. As a manager, you should be sensitive to this and try to approach these conversations with empathy.

• Have important conversations face-to-face: Compensation is deeply important to your employees, and it’s not the sort of conversation that should happen over Slack. Be mindful of the weight of these conversations by having them face-to-face. 

• Disagree and commit: As a manager, you might not always agree with the compensation decisions made by higher-ups in your organisation. But badmouthing them to your reports can cause frustration and resentment. Instead, explain the rationale behind the decision calmly and fairly, without bringing your opinion into it. 

• Be specific: When you bring an employee news about their compensation, it’s important to be as specific as possible. For example, if you have to tell an employee that they’re not getting the raise they hoped for, you can make the conversation easier by explaining your company’s criteria for salary increases. 

• Admit when you don’t know: No one can be an expert in everything. If an employee asks you a question about compensation and you don’t know the answer, don’t be afraid to say that you’ll need to check and get back to them. Just make sure to follow up once you have the information you need. 

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Compensation metrics

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As a manager, you might need to understand certain metrics related to compensation. These are things that are tracked over time and used to judge the effectiveness of your organisation’s compensation strategy. 

Here are a few common metrics that you might come across:

• Compa-ratio: This is a metric that’s used to compare an employee’s salary to the midpoint of their salary range. For example, an employee with a compa-ratio of 1.0 is sitting at the exact midpoint of the range, while a compa-ratio of 1.2 is above the midpoint.

• Salary range penetration: This is a percentage figure that tells us where a particular employee sits within their range. It’s an alternative to compa-ratio that compares a salary to an entire range instead of just the midpoint. For example, a salary percentage of 50% is at the midpoint of the range, while 40% is below it. 

• Gender pay gap: This is the difference in compensation between men's and women’s pay in your organisation, expressed as a percentage. Your unadjusted gender pay gap tells you the overall difference in pay between genders, while your adjusted gender pay gap compares only employees in the same job, level and location. For example, our unadjusted gender pay gap at Figures is 1%. 

To learn more about these metrics and others, check out our article on the subject. 

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What is Figures? 

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Figures is an all-in-one compensation management tool that allows organisations to build robust, reliable and scalable compensation structures. Our platform is backed up by a vast database of market data from across Europe and beyond. And it can help HR teams to create salary bands for the entire organisation in a matter of seconds. 

So, why should managers care about Figures? Simple: it gives you the confidence you need to have positive, productive conversations with your team about pay, in the knowledge that all decisions are backed up by a well-planned, structured and data-driven process. 

Contributing to compensation reviews is also easy with Figures. You’ll be invited to a secure, dedicated dashboard where you can keep track of requests and contribute to revisions in just a few clicks — without grappling with complicated, unwieldy Excel sheets. 

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Where to learn more about compensation

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The world of compensation is big and complicated. And, while we’ve done our best to give you an overview of the essentials here, the reality is that it would be impossible to cover everything in one blog post. 

So, where can you go to learn more about compensation? 

Well, this blog is a great place to start! We regularly post content to help HR teams, managers and employees keep up to date on key compensation concepts and evolutions in the world of compensation and benefits.

Want more insights? You can also follow us on LinkedIn for the latest updates, or head to our YouTube channel for Figures product tutorials and more. 

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