What is Compensation Analysis and Why Does My Business Need It?

Your employees' compensation is usually the single highest cost of running a business– both in actual dollars and overall success. Your ability to attract and keep top talent, avoid discrimination claims and build a solid culture significantly hinges on how you pay your employees. 

And with current high job turnover and uncertain economic times, ensuring your business actively engages in compensation analysis has never been more critical.

We'll cover the basics of compensation analysis, how it applies to privately and family-owned businesses, and more!

What is Compensation Analysis?

Compensation analysis is the process of regularly verifying your current compensation plan and matching it against industry norms. This analysis confirms that your employees are compensated fairly according to job description and duty. In addition, it's an excellent opportunity to notice common compensation differences between gender and race.

It also allows you to avoid overpaying for talent and align your compensation budget with company growth targets. You can confidently create job listings knowing you are paying a competitive rate for the experience and job title.

Why Compensation Analysis is Necessary for Your Business

Human capital is often considered to be the greatest asset for any company. But, unfortunately, it's also the greatest liability. 

Compensation is one of the largest expenses for any business. Not only that, but your employees' attention to detail, how they represent your brand, and who eventually takes over leadership are critical to lasting business success and profitability.

Business owners walk the line between providing fair wages and paying enough to attract top talent. But overpaying employees drains company resources. And companies rarely overpay all of their employees, leading to wage discrimination claims. 

Compensation analysis provides regular, objective reviews of industry standards against your current payroll. As a result, you'll be able to address any salaries above or below industry norms, enforce a culture of equity and honesty, and protect company profitability. 

How to Conduct Compensation Analysis for Family or Private Business

The basics for conducting a compensation analysis are the same for family-owned and private companies. However, compensation analysis may be more critical for family-owned businesses as work and relationships combine.

1. Define Job Duties

The first step is to review your organizational chart. A large portion of compensation analysis includes comparing to industry standards– but you can't compare one job to another without knowing if the position includes similar work. 

After your first compensation analysis, this portion should include edits or adjustments to existing job duties to create a true industry comparison.

2. Understand Contributing Factors to the Current Pay Structure

After standardizing job descriptions and scope, it's time to consider additional factors that may change compensation. Common examples include:

• Years with the company
• Years of experience
• Education or certification levels

For example, organizations regularly pay senior staff higher wages even though other employees do comparable work. And there's nothing wrong with that! Greater experience or time with the company often creates higher-value work. 

But this practice allows you to standardize what experience, tenure, and education mean for compensation so you can apply the same rules to all employees.

3. Obtain Third-Party Wage Surveys

Once you objectively understand your current pay structure, you can meaningfully compare it to industry standards. Most companies pay third-party labor research firms for access to wage and salary surveys. Using a third-party provider allows you the best access to objective, current, and correctly interpreted statistics.

4. Perform Comparative Analysis

Compare industry results to your company's pay structure. Identify areas where you are paying above or below industry standards. There may be valid reasons for the deviation– but make sure you understand why you pay differently than the industry average.

5. Adjust Pay Structure According to Findings

Finally, align your compensation structure to your findings. This may include bumping hourly rates higher to meet the cost of living changes or deciding to change department structures for optimal compensation. 

You'll reduce the risk of significant compensation changes when you perform compensation analysis regularly (at least annually).

Benefits of Having a Compensation Analysis Advisor

Compensation analysis is a challenging task– not only does it require a firm understanding of statistics and finance, but compensation is often a hot-button topic. Navigating analytics and communication can be overwhelming and lead to infrequent compensation analysis. 

Unfortunately, gaps in compensation analysis leave businesses vulnerable to discrimination claims, overpaying, or failing to attract the right talent. Partnering with a compensation analysis advisor greatly reduces strain while increasing compliance and profitability.

LeadershipOne is Your Trusted Compensation Analyst

LeadershipOne partners with business owners to navigate the nuances and emotions of compensation analysis. We specialize in family-owned businesses– helping you maintain a family legacy without damaging relationships.

Call us today for a compensation analysis consultation!

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