A structured compensation system - an opportunity to maintain the competitiveness of the company

3/25/2024

Kristiāna Boša, Figure Baltic Advisory senior consultant

March is traditionally the time when employee compensation is reviewed in many organizations. In order for compensation negotiations to be productive and meet the requirements of both employers and employees, it is important for organizations to have clear and understandable information about how fixed and variable compensation is structured, whether the compensation for a particular position in the organization is higher or lower than the market rate for that position, and so on. Data-driven decisions regarding compensation help organizations avoid several significant risks, such as setting disproportionately high or low compensation, which can affect the company's competitiveness. Additionally, employees experiencing stress due to compensation are about twice as likely to seek other employment, and there is nearly eight times less chance that they will successfully fulfil their daily duties.

By using qualitative data on compensation (both within the organization and in the industry and market as a whole), an organization can maintain the competitiveness of its compensation and promote employee satisfaction. A structured, easily understandable, and transparent compensation system significantly facilitates negotiations with employees regarding compensation, as well as attracting new talent. Such data can be obtained in various ways, but it is important to assess whether the methodology used to obtain the data is appropriate, determining whether the data is reliable and reflects a sufficiently large market share, thus allowing the organization not only to respond to employee inquiries about compensation in an informed manner but also to structure the compensation system and even be proactive in discussions about changes in compensation.

Comparing only similar value positions

For example, in the "Figure Baltic Advisory" compensation study, data is collected once a year. Within the study, participants (companies, organizations) provide information on actual employee compensation - both basic salaries in various positions and variable compensation, benefits offered to employees, etc. After detailed compensation information is obtained, job classification is performed, which essentially means that positions with similar or very similar responsibilities and compensation levels are identified in the data. It is important to understand that it is not possible to evaluate, for example, the compensation of all accountants, but it is necessary to differentiate between different levels of complexity within a single position. This principle applies to all positions. Through this evaluation, it is determined in which positions similar or equivalent value work is performed. The concept of "similar value work" becomes especially relevant in the context of the European Parliament and Council Directive (EU Pay Transparency Directive) adopted in spring 2023, which aims to strengthen legal regulation regarding fair compensation in the EU.

Evaluation of all positions based on uniform, predefined criteria

Determining similar value work means that the employer must be able to clearly define which employees in the company perform similar value work, and accordingly, these employees must be provided with equivalent compensation. To determine this, all positions must be evaluated based on uniform, predefined criteria, which exclude any discrimination - similar value work is measured by the necessary knowledge and skills in the respective position, the complexity of the work, the scale of collaboration, decision-making responsibility and resources, working conditions, and other criteria.

Within the study, negotiations are conducted with each organization to determine the duties of each position, necessary qualifications, etc. This helps to understand which positions are or are not comparable. It should also be noted that currently, information on compensation can be obtained from various sources, such as collecting information from job advertisements, which often display a wide range of compensation, likely including not only the compensation for a specific position but possibly also a broader range of compensation within the company. When analysing data from job advertisements, it is important to remember that it is only a projection of the compensation offered by a company to attract candidates. Attention should also be paid to whether positions that are truly comparable are being compared, as vacancies with the same job title often advertise different experiences and job content.

With each passing year, fewer time resources are needed

Implementing such a study also requires active involvement of organizations - sharing data, information, as well as participating in discussions with research consultants, but the more structured the company's internal HR and accounting systems are, the less time it takes. By participating in the study repeatedly, each subsequent year requires only updating data and making changes, which requires fewer resources from organizations. Additionally, we see that participation in such a study and job evaluation according to the study's methodology allows companies to gradually organize their compensation systems. Considering the methodology and the time required for both study participants and implementers, the optimal frequency of the study is once a year. To respond to sharp changes in the economy, such as inflation, it is possible to conduct, for example, pulse surveys that provide insight into current trends in the labour market, recent changes in compensation, and summarize plans and forecasts for the next year regarding compensation and personnel management.

Successful negotiations on compensation with employees

Many organizations make decisions about changes in compensation in the first quarter of the year, however, study data can be used throughout the year. Considering that approximately 10% of the entire labour market participates in the study, representing all major industries as well as various regions, organizations can make improvements to the compensation system with the information obtained and use it to organize successful negotiations on compensation with employees, being ahead of possible questions rather than just reacting to them. A structured compensation system, which is regularly reviewed, helps reduce the likelihood of situations where an employee dissatisfaction turns to the employer. This, in turn, reduces the risks of impulsive decisions - if an employee announces dissatisfaction and wants to terminate employment, the employer ends up in a reactive role and may make forced decisions about compensation that do not match the job duties or required competencies. Employees who know how their compensation is structured and that it is regularly reviewed are more satisfied.