"Fair" Compensation of Employees: A 10-Point Inspection

The issue of fairness is a dominant theme in today's employment environment. Employers and employees alike are concerned about equity in all areas of employment, from hiring decisions to promotion opportunities, to compensation and benefits.

How does an employer know whether its employes are being 'fairly' compensated? Examining the compensation structure is best done through a comprehensive self-audit. This self-audit is typically conducted under the auspices of legal counsel (corporate counsel and / or outside counsel). It is commonplace for legal counsel to retain the expert services of outside consultants to actually perform the auditing analyses. As a first step in this process, an organization can begin by examining their compensation policies and practices using a "10-Point Inspection":

1. Are the appropriate compensation structures in place in the appropriate business segments?
The first task is to understand the compensation structures of the organization. Frequently, this structure will differ within the organization by business lines, sectors, etc. For example, administrative and support staff may be paid an annual salary, while the sales team may receive commission earnings in addition to a base salary. The idea here is to gain an understanding of how employees are paid, and whether the exsiting structure makes sense for the functions served by the employee groups.

2. Is the compensation policy itself transparent?
Compensation decisions should be based on a set of consistent and well-articulated factors. It should be clear to anyone reviewing the policy what factors and metrics are used in compensation decisions. If these factors and metrics cannot easily be identified, the policy itself should be revisited to ensure that the decisions are based on tangible and measurable crtitera and are not arbitrary or completely discretionary.

3. How well is the compensation policy communicated to employees?
An organization may have the perfect compensation policy, but if employees don't know the details of that policy, there is still an opportunity for feelings of unfairness. The compensation policy should be communicated to employees, and employees need to understand what is expected of them in order to achieve the next merit increase, bonus payment, etc.

4. Is the organization's compensation package competitive in the marketplace?
In order to attract and retain top talent, the organization's compensation package needs to be competitive with what others are offering in the market. There are a variety of compensation surveys available that provide information on salary, bonuses and incentive pay, and other components of compensation. Examine where your compensation package stands relative to your competitors, and make adjustments as necessary.

5. How should we group employees for compensation comparisons?
In order for the analysis to generate meaningful insights, it is important that an employee's compensation be assessed against the appropriate comparison group. For example, it would be inappropriate to compare the compensation of the CEO to the CEO's administrative assistant. The two individuals serve completely different functions within the organization. Ideally, employees who have similar job functions, similar responsibility levels, and whose positions require similar skills and qualifications should be compared against one another.

6. Are employees compensated the same, and if not, why not?
After deciding which employees to compare against one another, the differences in compensation amongst these employees can be examined. Two employee may serve the same function, have similar levels of responsibility, etc., and still be ligitimately paid differently. These legitimate differences can be explained by "edge factors"; total company seniority, time in job, education and certifications, prior relevant experience. etc. Differences in compensation are not necessarily indicative of "unfairness" if the differences can be explained by legitimate factors.

7. Do we provide compensation "extras" fairly?
Employers are providing compensation "extras" such as flexible schedules, telecommuting, flex time, etc., in efforts to help employees manage the work-life balance. These extras should be examined to ensure that they are offered fairly and equitably to employees where appropriate.

8. Do we set initial pay for new hires fairly?
Setting initial pay properly can avoid a host of problems in the future. New hires with similar skills and qualifications hired for positions with similar functions and responsibility levels should be compensated similarly. Any disparities created by initial pay setting can compound over time, potentially leading to larger disparities in the future. A small differential in initial pay may seem innocuous, but can potentially develop into a large differential - and a large problem - years down the road.

9. Are we maintaining the appropriate documentation regarding compensation decisions?
It's far easier to document decisions on an ongoing basis than to discover at some later point this documentation is needed and have to attempt to recreate it. If there are special - but legitimate - circumstances governing a particular employee's compensation (such as red-circling), these circumstances should be noted in the employee's personnel file or other such tracking system.

10.What improvements in our compensation structure should we implement?
The answers to the pervious nine questions maturally lead to a better understanding of the compensation system as a whole. At the end of the day, the employer will have deeper insights into its compensation system, and may have ideas for improvement. A word of caution, however - any proposed changes to the compensation structure should be carefully considered from all vantage points prior to implementation. Changes designed to enhance one area have the potential to impact other areas. A thorough review of the proposed changes, and their reverberations throughout the compensation structure as a whole, should be done before taking action.

It's important to keep in mind that this "10-Point Inspection" is not a replacement for a comprehensive self-audit. Rather, it is a tool for beginning a dialogue and identifying the information and data that will be necessary for modeling the compensation structure in the self-audit. The "10-Point Inspection" is the first step on the path to a full assessment of the fairness of the organization's compensation structure.