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Compensation & Benefits

Overview

Sustainability intersects with compensation and benefits in the context of how an organization makes decisions about the distribution of its revenue. In sustainability terms, this analysis requires that decisions be well-balanced, rational, and equitable to address any negative social and environmental impacts and to protect the organization’s long-term viability. Creating a competitive and equitable compensation system also has significant implications for employee engagement and overall value of the organization.

Competing for talent

For organizations to stay competitive, they must attract and retain quality talent. One way to do this is to carefully evaluate the compensation and benefits they offer employees. These not only impact a company’s success in being able to attract and retain talent, they also define the organization and what it values. In today’s highly competitive market for talent, an organization needs to show that it cares for and values its employees so that they want to join and stay with the company and perform at their best.

Benchmarking compensation and benefits against other companies competing for talent is a traditional approach to establishing compensation and benefits. A low unemployment environment, coupled with growing concern about issues like work-life balance and corporate responsibility, has put pressure on companies to focus beyond core benefits to more innovative compensation and benefits structures and attributes.

When choosing an employer, employees are increasingly factoring into the decision-making process healthcare packages, vacation and family leave time, and a host of new workplace amenities. How a company facilitates and eases the stresses of working in a 24-7 connected world can influence an individual’s decision about whom to work for. While a competitive salary is still a core consideration, today’s employees are placing a greater emphasis on what additional compensation and benefits employers offer.

Fairness in compensation

An employee’s sense of worth within an organization is largely gauged by compensation as a function of performance. Employees almost always have a view on what their time, efforts, and achievements are worth; they expect their employer to recognize and respect the contributions an employee makes through just compensation. When an employee’s and employer’s perception of roles and compensation do not match, discontent ensues. Illogical or unexplained pay disparities within the workplace can polarize employees and result in a skewed understanding of the value of their own work in relation to the work of others.

To create a healthy compensation environment for all employees, employers must work to alleviate significant disparities in compensation relative to value delivered. Pay equity means that employers pay individuals or groups of employees the same wages to perform jobs that require substantially equal skill, effort, and responsibility. While pay equity aims for fairness in compensation, it does allow for consideration of an employee’s credentials, experience, tenure, and performance in wage setting.

Recognizing employee value through clearly defined compensation structures is inherent to workforce productivity and an organization’s long-term sustainability. As more companies clearly demonstrate fairness in their compensation and benefits programs, competition for talent will drive the market toward eliminating non-value-based pay disparities.

Pay scales

One way to set expectations and reduce unjustified differences in compensation is to establish pay scales. Compensation decisions can then be based on the employee’s position or role and the objective value of their work, with equal pay for equal work. To sustain this sense of equity in the work environment, gender, race, and any other non-merit-based factors should not influence the compensation process. Clear and unbiased pay scales, together with well-defined performance expectations and frequent, open performance reviews go a long way toward eliminating disparities and discontent.

Many organizations are also recognizing that minimum wage requirements often fall short on being able to sustain a basic living standard. For low-wage employees to feel valued at work, be productive, and perform at their best, they need to be paid enough to live without constant worry about day-to-day financial security. If the wage paid is not enough for a person to work a full week and earn enough to sustain a reasonable standard of living, then the compensation arrangement is neither sufficient nor sustainable. Minimum wage is not always the appropriate gauge, because it is set and adjusted by federal, state, or local governments at intervals that often do not reflect current local economic conditions.

Living wage

The concept of a living wage has evolved to address the issue of providing a livelihood. In organizations where employees are paid a living wage, significant benefits ensue. Employee absenteeism goes down and overall morale improves. Employee retention and productivity improve, profit margins increase, and customer satisfaction goes up.

Paying a living wage can be challenging for businesses because wages are determined and maintained based on variables of an individual’s family circumstances. These variables can create fairness issues if people who perform the same job end up with different compensation because of the personal choices they have made. One solution is simply to raise the lowest level of compensation to the highest living wage. Pay scales may need to be adjusted to avoid too much compression at the lower levels. Adjustments can also be made with additional benefits and amenities such as paid time off and remote working arrangements.

Resources

Employees as owners

Many organizations use incentive compensation in the form of equity compensation programs to tie key employees to the company by giving them an ownership stake. These programs have a variety of positive impacts, ranging from supporting labor rights to motivating higher productivity and creative thinking.

Many organizations believe that, at some point, workers should benefit directly from their efforts beyond fixed compensation when those efforts are significant multipliers of company value. Executives are often rewarded with ownership interests as part of their compensation package, sometimes with additional incentives based on the amount of value created during a performance period. Equity compensation programs that are expanded beyond the ranks of executives take the view that all those who make a recognizable and significant contribution to growth in company valuation should receive some additional reward for those efforts.

Equity compensation programs can also address the broader matter of employee engagement. Employees who hold a direct stake in the company are far more interested in the company’s future success. These employees are often more motivated to be productive and innovate in their work, demonstrating greater long-term loyalty to the company to influence and reap the benefits of their ownership stake.

Balancing the “who” and “how much” decisions of equity compensation programs requires a management team to think about roles, the degree to which employees contribute to growing the value of the company, and how those organic workforce contributions should be rewarded, as compared to the rewards expected by those who provide financial capital to fund and fuel growth opportunities.

Variable or incentive pay

Variable or incentive pay plans provide an option for controlling compensation costs while incentivizing change initiatives at the core of sustainability programs. To be effective, additional opportunities for compensation should be tied to clearly stated SMART goals. Goals must be carefully selected so that desired behavior continues and is not disincentivized once the goal is achieved. Plans should be practical and easy to understand. This type of compensation is often used to increase loyalty and productivity, and deepen the bench for filling leadership roles.

See also Governance> Executive Compensation> Sustainability performance pay

Resources

Living wage

Businesses that pay a living wage, rather than a minimum wage, protect themselves and their workforce from the many issues associated with the working poor. Many workers receiving minimum wage are living at or near poverty levels, qualifying for subsistence programs. The working poor have higher rates of illness, missed work days, and stress. Employers who do not pay their employees a living wage risk an unstable, unmotivated, and transitory workforce, which often results in operational disruptions and costs that exceed the costs of paying a higher-than-minimum living wage.

Resources

Core benefits

Core benefits reflect an industry’s standard for providing basic benefits such as health, life, and disability insurance, paid time off, unpaid leave, and retirement savings. To retain the value of a skilled workforce, core benefits must be on par with others in the industry as a baseline for competing for talent. Companies benchmark their core benefits package to competitors to ensure that they are at least on a level playing field for attracting and retaining talent. Improvements to core benefits can be a differentiator and signal positive attitudes toward valuing employees.

Resources

Pay equity

Recent high-profile lawsuits and new legislation have elevated pay equity issues for employers. Beyond exposure to lawsuits, this type of discrimination, when uncovered, impairs the ability to attract and retain talent. Employers who are committed to pay equity develop, implement, and enforce clear, effective policies and initiatives aimed at correcting pay disparities. This commitment to extends to hiring and promotion by requiring fair, objective, predictable, and measurable criteria in written performance guidelines. A significant requirement for pay equity is transparency, making information on payscales and performance requirements available to all employees.

Workplace amenities

Workplace amenities are only effective where they reinforce and support an employee-based corporate culture. The goal of amenities is to make employees’ personal lives easier, allowing them to be more focused at work because the perks offered save time, make healthy behaviors more accessible, eliminate distractions, and reduce stressors. Companies do well to understand corporate culture before implementing amenities to ensure that use of the amenities they provide will be accepted at all levels of the organization.

Comp & benefits

Compensation and benefits are the financial rewards distributed to employees in exchange for work performed. Employee compensation and benefits are divided into four basic categories:

Guaranteed pay – a fixed, monetary (cash) reward paid by an employer to an employee. The most common forms of guaranteed pay are base salary or an hourly wage.

Variable pay – a non-fixed, monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance, or results achieved. The most common forms of variable pay are commissions or bonuses.

Benefits – programs an employer uses to supplement employees’ compensation, such as paid time off, medical and dental insurance, retirement plans, transportation in the form of a vehicle, subsidy, or reimbursement, flex or compressed work schedules, or childcare.

Equity-based compensation –programs for employee ownership of the company that an employer uses to supplement employees’ compensation. These programs are used to recognize and reward, or incentivize continued, contributions to the long-term success of the company. The most common examples are stock purchase plans, or grants of options or restricted interests, with or without delayed vesting schedules.

Employee compensation and benefits are influenced by internal and external factors.

Internal factors include:

  • business objectives
  • organizational structure
  • internal equity
  • labor unions
  • culture

External factors include:

  • the state of the economy
  • inflation
  • the unemployment rate
  • the relevant labor market
  • labor and tax laws
  • specific industry trends