Few things trigger turmoil in a small business faster than suspicions of unfair compensation practices. Issues like out-of-whack pay levels or discrimination claims can quickly sour workforce morale and destroy teamwork. One way to overcome these issues is with a compensation audit, which examines the total compensation packages of employees, including salaries, bonuses, and other monetary incentives. The goal is to determine whether the total compensation people receive is equitable from an internal company perspective and externally compared to the broader labor market.
Making pay equitable
Companies want to know that everyone is being paid appropriately based on their position and industry standards, not on gender, race, or age. A compensation audit will likely be more complex in a larger business, which might have a more sophisticated situation with more salary bands, while a smaller company has fewer, less regimented pay grades. While large organizations typically have in-house compensation teams to handle issues like this, many small- to mid-size businesses lack the resources to monitor it. That’s a problem, says Jennifer Osborn, president of TalentSENSE Human Resources & Recruiting, because “The longer they lose sight of it, the more risk there is.”
Businesses conduct compensation audits for various reasons, including lawsuit protection and worker retention. While protection from lawsuits is self-evident as a reason to commission a compensation audit, worker retention may be less obvious. In a company, people talk, and if they discover others have significantly higher salaries than they do, they might start looking for a new job.
Conversely, one of the big advantages of conducting a compensation audit is the positive impact on retention levels and job satisfaction increases. “People appreciate that their company cares enough to ensure their compensation levels are aligned with internal and external norms,” says Jennifer. “It sends a message.”
Collecting relevant data
The audit should examine internal salaries: base salaries, bonuses, commissions, benefits, and any other compensation. Externally, you want to use broadly available compensation surveys, although picking the most valid and reliable data can be challenging. Industry-specific survey information is also helpful if it aligns with the company’s talent market.
One non-profit organization conducted a selected compensation audit because it wanted to know whether it was paying its leadership team enough. In other cases, companies were hiring new positions, such as project coordinators, and needed help determining how they would fit in with other executive positions.
Surfacing discrepancies
A compensation audit will surface discrepancies. Once you have established compensation ranges for a given position, if your analysis reveals some jobs are outside of this range – either high or low – they require additional analysis to determine whether they are legal. If not legal, the company must take steps to rectify the situation through pay increases, income freezes, the introduction of non-monetary benefits, or other techniques.
How often should you conduct compensation audits? “If they can afford it and have the time, I would recommend annually,” says Jennifer, “because compensation data changes so frequently.”
Contact us to learn more about TalentSENSE compensation audits.