Navigating the tricky balance of getting rewards and compensation right is not for the faint of heart. Hopefully your employees are happy to exchange their work and energy for more than just their remuneration, but let’s face it, compensation is a big piece of the puzzle. It’s so easy, however, to make mistakes with compensation and rewards.

Making decisions about compensation and rewards is both an art and a science.

Inequitable compensation can quickly lead to disgruntled employees, which of course is a short step away from decreased productivity, poor employee morale, and employee retention issues, all of which are difficult to turn around.

There are many ways to look at your employees’ compensation and rewards, and the ideal approach is to combine these different things to give you the best chance of getting it right. Here are some of the key factors to consider.

1) Ensure a fair process with regular compensation reviews

Unfortunately, the biggest mistake companies make is a failure to have a real process around compensation and rewards. When this happens, decisions are made based on which employees demand salary discussions. Inevitably, the squeaky wheels get the most attention and large disparities in equity can quickly arise between employees. Of course, the solution is to have a regular interval for compensation reviews.

At the very least, choose a time of year to have an annual review where HR and management will discuss the compensation and rewards of all team members. Using your HR software, export a list of employees, their compensation, and all measurable rewards (including benefits, training, stocks, etc) to facilitate this discussion.  

2) Check for gender bias

We all know that the gender pay gap exists, yet none of us think that there might be a problem right within our organisation. Reviewing compensation and rewards through the lens of gender will help close this gap and ensure that you’re not underpaying, or overpaying employees based on their gender. In your report, try filtering your employees by gender and see how the compensation looks. For the equivalent levels of seniority, are all genders paid equally?

3) Check for cultural bias

Similarly, we need to check how your compensation and rewards looks from the perspective of cultural differences. When you create your reports from your HR software, be sure to include this important marker and then filter your reports by ethnic group. Does the distribution of total compensation seem equitable, or are some groups that are disadvantaged?

4) Review the relative impact of your employees

If you sort the total compensation and rewards by employee, and order it from highest to lowest, does it tend to reflect the relative impact that each employee has on the organisation? Are the employees at the top of the list making more of a difference than those down lower? Of course, this is not an exact science, but reviewing things in this light can highlight inconsistencies.

Another way to approach this is through the lens of future regret. Looking down your list of employees, if one of them were to leave tomorrow, would you regret not paying them more?

5) Understand industry compensation norms

Perhaps it’s unfortunate, but it’s a fact that some industries or professions are simply paid more than others. Sometimes these differences seem unfair, but they are usually driven by supply and demand factors operating at a macro level. You can obviously pay above market rates, but if you try to pay below market rates, you’ll soon find it difficult to attract and retain staff in these positions.

For each industry that you operate within and each of the key professions, do some research to get an understanding of the typical compensation and rewards others are offering. With this information on hand, filter your total compensation list by department and position and then check to see if any of your employees would feel undervalued in their own industry. Of course, this might throw out other considerations (such as relative impact), but each of these factors needs to be taken into account.

6) Factor in cost of living differences

For organisations that operate across multiple cities or countries, it’s important to do a sensibility check based on the different cost of living factors for each location. This doesn’t mean that you should take advantage of people living in lower cost areas, however, it is one more part of the overall equation. Filter your report by location and see how the average compensation compares for different regions.

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As you can see, it’s not easy to devise a perfect rewards and compensation structure when there are so many different factors to consider. Taking the time to do a proper compensation review with these factors in mind, however, will almost certainly lead to more equitable remuneration for your team members.

Making decisions about compensation and rewards is both an art and a science. You need to be able to crunch the numbers and review through the different filters, but you also need to consider the relative importance to the organisation, which can be difficult to quantify. To make fair remuneration decisions you’ll need to have a thick skin and an ability to justify your rationale.

Fiona Adler is Director of HR software solution HR Partner. She also writes about entrepreneurship at DoTheThings.com.

Interested in this topic? Read The link between reward and wellbeing: how to get the balance right.