Compensation is one of the most complex disciplines in the field of talent management, or human resources. Handling employee compensation issues properly requires knowledge of:

  • Employment trends
  • How to value jobs both internally and externally
  • How to adapt to varying financial conditions

Most companies use compensation to help build, motivate and retain a strong, innovative and productive workforce. The ongoing challenge is to balance employee perception while allowing for differentiation of pay across the workforce.

Perceived compensation equity among employees

A common belief is that an employee’s compensation satisfaction would be a function of the amount received—i.e., the higher the compensation rate, the greater the satisfaction. However, the situation is not that simple. In fact, the reality is that the amount of pay matters less than its perceived fairness or equity.

Employees each have their own perception of internal equity as it affects them among their peers, managers and subordinates. If an employee believes they are underpaid, they will typically react by reducing their effort or performance. This may result in, for example, increased absenteeism and sick leave, tardiness, unmet deadlines, excessive work breaks, lack of focus or even a resignation.

What is the right compensation balance in talent management?

Many companies, including startups, struggle to find the right compensation balance between employee perception and paying for performance. The ultimate goal is to dedicate enough money to motivate the desired results without paying too much or, worse, motivating the wrong results.

A lean budget and compensation issues

This balancing act is even more challenging when faced with a lean budget and resources for compensation are limited. How do you spend your dollars wisely?

Consider how employees view your company’s overall value proposition—that is, everything of value you provide to your employees, including non-financial rewards.

Do not underestimate the power of a talent management compensation strategy that differentiates based on performance. Typically, with the right communication plan and decision-making transparency, employees will understand and embrace this type of compensation program.

Differentiating effectively: Salary versus performance-based compensation

Increasing your salary and incentive budget is not always an option, so leaders need to make sure they allocate rewards in ways that clearly differentiate based on performance. Even those companies that can increase these budgets should focus on this type of differentiation.

Successful companies often must make tough decisions to provide salary increases only to employees in critical jobs, the highest performers, or any other important employee group, such as those with scarce skills.

You may find it helpful to reserve a portion of the salary and incentive budget, sometimes called a “market adjustment budget,” and allocate that amongst a defined group of critical employees. This ensures that the company’s investment is targeted toward those employees who truly create value.

Lean budgets, talent management and employee compensation

Sometimes, when finances are especially lean, budgets must be decreased or frozen. It is important during these times to ensure that employees understand the reasons for the cuts and the plan to turn the situation around.

If possible, leverage your market adjustment budget to reduce the impact. The best and brightest employees will still have employment options and may decide to join another organization that they believe better values their abilities and skills.