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How Do You Design a Fair and Effective Compensation Program?

Category: Alliance Blog
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In recent years, AAM's Director of Human Resources has had the rare opportunity to reinvent a compensation program, with a focus on equity and transparency for staff.

I’ve managed compensation programs for most of my career in human resources, but until recently, this usually meant administering an existing set of guidelines that were established long before my arrival at an organization. I had never been involved in the process of building those guidelines myself until 2019, when AAM, where I am Director of Human Resources, began work with compensation consultants to review and update our pay system and practices.

We decided it was the right time to start the process for a couple reasons. First, at that time, AAM was creating new positions to support our DEAI work as part of our strategic plan. While reviewing our criteria for assigning levels to job positions, I noticed that our qualifications were weighted more toward credentials rather than skills, and the guidelines didn’t seem to align with the current values and goals of our organization. Second, there had also been an increasing number of requests from staff for more clarity regarding the different skill sets required at each job level.

For small organizations like AAM, a nonprofit with forty employees, intentionally reviewing pay practices on a regular basis is not always high on the project list. In fact, because of challenges like a tight budget and copious competing priorities, it had been about a decade since we had engaged a compensation expert to review how we make decisions regarding pay. We did what we could to keep our compensation program relevant and competitive in that time—I began benchmarking pay for each of our positions on an annual basis, using surveys such as the DC SHRM Compensation and Benefits Survey and Association Compensation and Benefits Study to monitor and compare our pay to that of our peers, and we also started including staff demographic data in our review of pay so that we could better monitor potential inequities. But even with these added measures, it was clear that we needed a comprehensive analysis of our practices and the market if our compensation program was going to reflect the needs of our employees and the organization.

I had many questions about how to create a compensation program that would help AAM attract talent, incentivize specific skill sets, provide clarity to staff on AAM’s pay practices, promote fairness and equity, and better reflect our needs and goals. To answer those questions, we chose to partner with Keating Advisors, a compensation design and benchmarking firm, because of its staff’s experience working with similar-sized nonprofit organizations in the DC metropolitan area. Their knowledge of our local labor market and our competitors for talent (which include federal government agencies, the contractors that serve them, and private industry) was an invaluable asset. Over a four-month period, Keating reviewed our current compensation practices and helped us create a customized program that aligns with our organizational values and goals. The project included:

  • Updating all of our job descriptions
  • Creating, for the first time, an organizational compensation philosophy statement
  • Benchmarking all of our positions against market data
  • Revising our job levels and pay bands
  • Establishing career level definitions to distinguish skills sets, roles, and responsibilities at each job level
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Conducting such a comprehensive analysis of a compensation system can seem like a daunting endeavor, especially if your organization has a limited (or no) human resources function. At AAM, we were fortunate to have leadership’s support from the very beginning, and although the analysis did require a significant time commitment, it has been a worthwhile investment. Discussing compensation practices enabled deep conversations about what values, skills, and behaviors AAM’s leadership team wanted our system to foster. Reviewing and updating job descriptions brought clarity and awareness of staff’s roles. Analyzing benchmarking and market data illuminated how our pay may be attracting or not attracting talent. Creating career level definitions provided more transparency about how positions are graded and what skill sets are needed to progress to higher levels. Writing compensation administration guidelines set a baseline for decision-making, which has made determining promotional and merit increases fairer and more consistent. Having these systems in place has enabled us to better spot issues such as pay or internal equity imbalances.

In our compensation philosophy statement, we have committed to periodically reviewing our pay practices to age the pay bands and ensure that our ranges keep up with labor market changes and inflation. We consider our compensation program to be a work in progress, and although our budget does not always allow us to bring staff pay to target ranges immediately, we have done so on an incremental basis. Periodically revisiting this data has helped us better prioritize budgeting for merit increases and salary adjustments and has given us a road map for making compensation decisions.

This past spring, we worked with Keating Advisors again to review and update AAM’s pay bands, as recommended every two to three years. Afterwards, I had a chance to reflect on labor market trends, the value of compensation programs, hallmarks of an effective pay program, and how small employers can make the most of compensation planning with Jenn Wendus, former Managing Director at Keating Advisors. Read our conversation below.

What are some labor market trends you are seeing, and how might they be impacting the museum field at large?

Organizations of all types are currently experiencing a very competitive labor market with historic inflation and rising wages, as many continue to work to stabilize after pandemic setbacks in funding and/or staffing. This is coupled with economic uncertainty and fears of a looming recession. Retention is a top concern for many organizations—and organizations are revising their salary budgets upwards to reflect this. Museums, like other employers, will likely continue to face hiring challenges in a very tight labor market and may need to augment retention efforts to meet staffing needs.

Why does an organization need a compensation program, and what are the basic components?

A clear compensation plan supports an organization’s ability to attract, retain, and motivate staff that are aligned with its mission. A defined compensation philosophy, pay bands for positions, criteria and/or definitions for assigning positions to a pay band, and compensation administration guidelines are all components of a comprehensive compensation program.

What type of compensation data/resources should employers utilize when making offers of employment, setting merit and promotional increases, and planning compensation budgets overall?

There are many sources of compensation data. Some resources are free–such as data from the Bureau of Labor Statistics and articles with summarized labor market trends data published by industry associations such as the Society for Human Resources Management (SHRM) and WorldatWork. Additional resources with more robust data don’t necessarily have to cost a lot. Such resources include published salary surveys for the nonprofit sector or surveys available via a relevant industry group. The most important consideration when reviewing compensation data/resources is identifying the most relevant resources for your organization type, size, and location to best reflect where your organization competes for talent.

How can employers be more transparent about their pay practices?

Pay transparency is a continuum that can range from sharing your organization’s compensation philosophy with all staff to publishing pay bands to making individual salaries public. Many organizations are moving in the direction of increased pay transparency to support more equitable pay practices. In most organizations, this looks like sharing the organization’s compensation philosophy, pay bands, position level criteria and/or definitions, and compensation process guidelines. Increased transparency about pay practices demands consistency and accountability and supports increased equity.

What are the hallmarks of a fair and equitable compensation program?

That’s a really broad question, but at a minimum, organizations should start by focusing on three key areas: having pay ranges that accurately reflect the external labor market; documenting and communicating to staff the processes for how performance is evaluated and how salary decisions such as merit increases, bonuses, hiring salaries, etc. are determined; and incorporating a review of internal compensation goals into annual budget planning. Fair and Equitable Compensation: The Foundation for HR Programs, an article from the HR Exchange Network, provides more detail on building a compensation program and has some excellent tips on ensuring equitable practices.

The current economic environment and the possibility of a recession has many organizations, museums included, struggling financially with issues such as low attendance, budget cuts, layoffs, and staff shortages. What are small, actionable steps that even a small institution with limited resources can take towards ensuring fair and equitable compensation practices?

First, know that ensuring fair and equitable compensation practices requires ongoing commitment–it is not a “one-and-done” effort!  Although it requires an initial investment of time, effort and resources to create a formal plan, having a compensation plan can help increase transparency with staff and set expectations. Here are some suggestions to get started:

  • Define and be transparent about your organization’s compensation philosophy.
  • Assess your organization’s job descriptions through an equity lens to ensure that they accurately reflect the responsibilities and skills required for each position. An example of how to review job descriptions for potential bias (and other tactics for managing bias in recruitment) can be found here: 10 Things We’ve Learned About Unbiased Hiring Practices at AAM
  • Commit to regular reviews of both internal compensation equity and external competitiveness. Internal equity means reviewing compensation for current staff to ensure that employees in similar positions with similar skill sets are compensated in a similar way. External competitiveness means assessing compensation relative to similar positions in markets where your organization competes for talent.
  • Develop written compensation program guidelines. Even if they are simple, written guidelines provide employees with clarity around how compensation works in your organization.
  • Develop a communication plan to explain your organization’s compensation program to both managers and staff. Be sure to equip managers with the training and tools they might need to facilitate effective conversations with their staff about compensation. Consider developing a compensation communication calendar with checkpoints throughout your organization’s annual cycle, connecting the compensation program with performance management, career development, or other relevant cycles.

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