A Guide to Compensation

Analysis

Compensation analysis is vital to providing fair, equitable compensation. Smart

organizations know that providing the right compensation is one of the key pillars

to attract and retain the best talent. A thorough compensation analysis provides

the data and insights for critical decisions as it relates to salaries and total

benefits for employees.

Labor costs make up the majority of expenses for most organizations. It can account for

up to 70% of the business cost. It is, therefore, critical to understand what this cost

consists of. Although compensation analysis can be a complex process, it is a

necessary tool to ensure fair workplace practices and contribute to your employee

engagement strategy.

The purpose of this guide is to provide a basic understanding of compensation analysis

and its associated benefits. It also offers practical steps on conducting a compensation

analysis, which you should tailor to your organization’s needs.

Contents

What is a compensation analysis?

Benefits of conducting a compensation analysis

Seven steps to a successful compensation analysis

What is a compensation analysis?

A compensation analysis uses internal and external data to determine whether an

employer rewards employees fairly or not for the work they are doing.

Here are a few key concepts in compensation analysis that you need to understand:

 External competitiveness – Employers compare their compensation data and practices

to external companies. For example, Salesforce found that their engineer salaries were

comparable to engineers at Microsoft. It was a fair comparison because of the size and

geographical spread of both organizations. On the other hand, engineers at Slack were paid

much less, but they are a much smaller organization.

 Internal equity – Employers compare employees’ salary and indirect

compensation data to ensure fair compensation for the level and type of work done.

 Region – Employers compare compensation data of people doing similar work within a

particular region.

 Level – Employers compare employees’ levels and the level at which they are

compensated.

In all of the components mentioned above, it’s noteworthy to mention that even though

salary data is important to look at, it is only one part of compensation. There are
other employee benefits such as medical care, discounts, car, share schemes, and

housing allowances.

A key characteristic of compensation is that it is dynamic. This means that it continually

changes and progresses based on the internal and external environment.

As an example, Slack traditionally compensated employees based on localized

benchmarks in their New York and San Francisco offices. Due to COVID-19, employees

had to transition to working remotely. As a result, employees relocated to the cities

where their homes are located. Slack subsequently revised their salary bands based on

employees’ location.

Benefits of conducting a
compensation analysis
A compensation analysis is a vital component of an organization’s talent management

strategy, as it helps attract and retain the best employees on the market. Let’s take a

look at other benefits of a compensation analysis:

 Salary benchmarking gives an impartial idea of competitive salaries and allows

organizations to make informed decisions. Salary benchmarks provide data points, whether it

is worth it or not to pay an employee above the average salary. It also helps understand the

holistic remuneration packages offered by employers.

 Evaluating pay equity allows organizations to compensate employees doing the same

level of work in a fair way. Conducting a comprehensive compensation analysis also enables

you to correct historic pay gaps.

 Transparent compensation decisions leave the decision-making of salaries in the

hands of accurate and impartial data. This leaves employees with a higher level of trust in

the organization and their managers.

 Compensation analysis is dynamic, as mentioned before, and thus, you’re able to

make projections based on future needs or employees and how this may affect your

compensation strategy.

 Identifying opportunities – Through a comprehensive compensation analysis, you can

identify where you can improve your compensation strategy. You may be able to find

different ways to remunerate employees, for example.

It can be a part of your HR reporting.

Seven steps to a successful

compensation analysis
Now that you understand what a compensation analysis is and its benefits, let’s take a

look at the practical steps of how to do a compensation analysis.

1. Explore the current state of compensation

The first step is to gather and consolidate all compensation data in your organization.

Some companies already have compensation analysis software that helps with this, or
others use a spreadsheet with data from their HRIS. Whatever your approach may be,

make sure that the information you collect includes the following:

Data Description

An up to date job description for every job in the organization.

This should include job titles, roles and responsibilities, level,
Job Descriptions
experience needed, and education. This step could take up to six
to eight weeks, depending on the size of your organization.

This information is usually embedded in the company handbook,

Organization compensation and the deeper philosophy sits with the CEO or HR Heads. A
philosophy compensation philosophy discusses the organization’s
compensation philosophy and how they reward employees.

This is usually an annual survey that is completed, which includes

pay structures and salary information. It compares internal pay
Salary benchmark data to the external market. Depending on the time of the year,
you may need to use the previous year’s data or wait until the
new compensation market analysis data is published.

You need to have an accurate headcount of the number of

employees per department. This information also needs to
include the following information:
Employee information – Age
– Location
– Working hours
– Exit / Intake data

You also need to ensure you collect third party information that could be vital to your

organization’s compensation analysis efforts. Companies such as Korn Ferry, Deloitte,

and PWC typically have large data sets that include global and local salary and

compensation information on a mass scale.

Check with the relevant HR bodies in your country as to the most reputable and reliable

companies with these data sets, as they will act as a valuable comparative information

source.

2. Determine the types of analyses you are going to

conduct
You need to consult with key stakeholders to determine the purpose of your

compensation analysis. This will guide you to determine the type of compensation

analysis you will be conducting.

 For example, suppose a CEO was interested in why employees’ salaries were

disproportionately increasing each year compared to the market. In that case, you may want

to conduct a salary analysis of employees who have entered and exited the organization.

 If you need a snapshot to understand the cost per employee, you may conduct a

“Headcount analysis” to provide an accurate picture of staffing levels and compensation per

employee.

 Another example is that you may want to understand why so many high-talented

employees are leaving your organization. A retention analysis looks at compensation levels

and performance data and compares it to internal and external parity to make sense of this.
To reiterate, your compensation analysis should always be based on purpose. This will

ultimately help you extract meaningful information and present it in a palatable way.

3. Choose the right technology

To analyze compensation data, you can either use an Excel spreadsheet or

compensation analysis software. Let’s explore these two options within a bit more

detail:

Excel

Microsoft Excel has, for a long time, been the favored tool to analyze compensation

data. For an organization that wants to keep its operating expenses down, this is a great

solution. It’s also suitable for small organizations as the calculations needed to be done

will likely not be that complicated. Even a novice at Excel would be able to use it.

On the other hand, however, Excel is prone to human error. Multiple people can access

a spreadsheet, and a misplaced comma can yield inaccurate and consequential results.

It’s also not automated. So, if an employee leaves the organization, it requires someone

to delete that employee off the spreadsheet. Excel is also not the most ‘attractive

format’ to present to stakeholders. It requires manual copying and pasting of information

into presentations, which can again lead to errors, and it’s also extra work.
This is what the base data for your compensation analysis in Excel can look like.

Compensation analysis software

Modern compensation analysis software makes managing salary information seamless

and straightforward. Most companies that offer compensation analysis software are

cloud-based. Therefore, salary surveys and market prices are already plugged into the

system and regularly updated. It makes it easier and more up-to-date as internal

salaries are checked continuously against market rates. It also has built-in visualizations

and widgets that are customizable, reducing manual effort and allowing for faster

decision-making.

However, many organizations are currently budget-conscious, and compensation

analysis software can be expensive. It may be challenging to convince key decision-

makers to invest in compensation analysis software. On the other hand, the cost of

losing talent is far more consequential, so you can always justify the decision to invest

in such software, especially if you’re a large company.

4. Run the calculations
Base your calculations on the type of insights that you need. For example, if you want to

understand the average salary per region, you might divide employees’ total salaries by

the number of employees in that region.

One of the most common calculations that is in most compensation analysis is the

salary compa ratio, or comparative ration. This ratio helps you determine if you are

compensating employees fairly and in line with your organization’s philosophy.

Here is the formula to calculate the compa ratio:

Compa ratio = (Actual salary / mid point of pay range) x 100

The result will be a percentage. A result of 100% means the employee is paid exactly at

the midpoint of the current market rate for the given position as defined by the

organization. Anything below means the employee is being paid below average, and

anything above indicates an employee is being paid above average.

Another type of analysis can be a pay equity analysis to determine whether there are

any differences in compensation when looking at gender or race/ethnicity. Choose your

variables carefully for this analysis.

5. Address the challenges
Whether you have conducted your analysis on Excel or using compensation analysis

software, it would have turned your information into insight. As a result of this, work on

converting insight into action to give validity to the analysis completed.

The analysis, for example, may indicate that certain employees are underpaid. In the

next annual salary increase, you need to make sure that these employees get

competitive pay in line with their peers. You may not be able to reduce the salaries of

overpaid employees retroactively, but it will guide you in future salary increases made

on these employees.
The insights from the analysis should also inform your future compensation and talent

strategies. For example, if you’re underpaying data scientists in your company and data

science is a future skill that is rare, you may want to increase the total compensation for

your existing data scientists.

6. Communicate the results

Finally, once you have completed your compensation analysis, it’s time to communicate

the conclusions to your employees. You need to develop a communication strategy,

which will determine how you communicate the insights to employees, managers, and

key stakeholders. Here are a few tips on this:

 Who needs to know? Not everyone needs to know about the results. Determine this

based on the purpose of the compensation analysis.

 What is the current climate? If employees are already feeling stressed, you may want

to provide more context in your communication. For example, companies such as Intel,

Adobe, and Uber have found that employees are more stressed and less likely to talk about

salaries to their managers during a pandemic. If employees expect a pay increase, but the

compensation analysis indicates they are being overpaid, you may want to communicate the

results with more empathy.

 What is needed? It is unnecessary to share all the information. You do not need to

communicate the salary information of external companies or internal employees to

employees. However, you do need to provide context and insights into the analysis (e.g.,
 number of participants, general increases across the company, the extent of the study – e.g.,

using internal and external survey data).

o It’s also important to discuss challenges that the organization has experienced

and the external environment. A Korn Ferry study, for example, showed that only 35% of

survey participants said that 100% of employees would be eligible for increases in 2021.

External environment and market trends can have a massive impact on salary increases

or decreases.

7. Train your managers

In most organizations, managers are the ones that have compensation discussions with

employees, and not HR or reward managers. You need to train managers on:

1. How to discuss an increase or flat salary change for employees.

2. How to anticipate unhappiness from employees and how to deal with that.

3. Things not to say and to never make promises that they cannot fulfill.

Because managers are always busy, you may want to create a manager guide and a

communication plan.

Your communication plan needs to include clear terms and phrases that are to be used

in a compensation conversation. Other components you may want to include in your

communication plan include

 Develop a theme – You can create a caricature or catchphrase related to compensation

in your organization.

 Design – You can create a consistent brand and theme for all communications as it

relates to compensation. In this way, you’re able to create a consistent experience for

employees, irrespective of their department, role, or location.

 Multiple channels – Even though employees mainly have remuneration and

compensation discussions with managers, it should not be the only channel. Employees

should understand they can talk to HR on any platform and any member of the leadership

team through multiple channels (text, email, private meetings, etc.)

A final word
Getting a competitive salary is the top criterion when considering a new job. If

organizations want to hire and retain great employees, they need to provide adequate

compensation. Compensation analysis helps build a data-driven compensation strategy.