Sabrina

Do you know what happens when pay isn't planned in a small business? Chaos. I've seen it so many times: two employees doing the exact same job, but one makes 10,000 more than the other, not because they're better performers or have more experience, just because one of them was hired later or negotiated harder. And the result of that? Gossip, resentment, turnover, and now it's HR's problem to fix. So today we're going to talk through what to do when you inherit a pay mess. By the end, you'll know the simple steps to take in anything goes pay structure and turn it into something consistent and fair. And I've got Penelope, our very own payroll and operations business partner here. She's going to pop in from time to time with her view on the payroll side of things. That's the stuff I can promise you will save you a headache later. Welcome back to the HR Connection, the podcast for those managing HR and a 1 to 500 employer. I'm Sabrina Baker, your host, and before we jump into today's topic, I wanted to tell you about our HR readiness assessment. It is a free quiz that you can take on our website that will give you a score in the areas of HR compliance, infrastructure, and strategy. Once you take the quiz, you not only get your score, but you get some tips and tricks from us on how to future-proof your human resources in your small environment. That link is in the show notes. Let me paint this picture for you. You're in a small business with about 60 employees. Over the years, the company has hired whenever it needed to, and each person's pay was set kind of randomly. Some got whatever they asked for; others got whatever the budget could handle at the time. There's no rhyme or reason, no consistency. So you have things like three marketing coordinators that do the exact same job with around the same experience and tenure, yet you have one of them making 45,000, one makes 53,000, and one makes 62,000. And guess what? They all know it. When pay doesn't make sense, people stop trusting leadership.

Penelope

On the payroll side, it's just as messy. You've got managers throwing out spread raises here and there or promising bonuses that no one ever tells payroll about. It makes processing payroll a nightmare, and worse, it makes your records inconsistent.

 

Sabrina

Exactly. And the first step in fixing that mess is to admit that it's broken, get buy-in from your leadership to do something about it to be more consistent with pay, and then follow the steps that we are about to outline. The first thing you need to do is take inventory. Pull a list of every employee, their title, their tenure, and their current pay, including columns for commissions and bonuses if they are eligible for those. Nothing fancy, just get it all in one spreadsheet. When you lay it out, it's going to be easy to start to see patterns. Maybe two people in the same role are 10K apart. Maybe someone with less experience is making more money than someone who's been loyal for years.

Penelope

When I help clients with this, the very first thing I do is make sure payroll records match what's in HR. You'll be surprised how often a system still has someone as hourly when they're actually salaried or a raise didn't get updated. Cleaning that up first makes sure you're working with accurate data. Then you can take the accurate data and start highlighting those things that Sabrina mentioned that don't line up. Also, don't just stop at title and tenure; add gender in there too, as the Federal Equal Pay Act could come into play here and the California Equal Pay Act if you're in California.

 

Sabrina

Once you know what everybody's making, the next step is to ask, is this even competitive? This is where you are going to go to the market to do some market research. While paid subscriptions to survey comp tools are really helpful, we subscribe to PayScale to make sure that our clients get the most accurate data. They're also very expensive, and so if you don't have the budget for them, you don't need them. Tools like Gusto, LinkedIn, Glassdoor, even the Bureau of Labor Statistics can give you a sense of the going rate. My favorite free search is on LinkedIn. With all of the salary posting laws that have been enacted in recent years, more and more companies are posting their salary ranges on the job posting. So I will go to LinkedIn as though I am looking for the exact job in my city and my industry and see what other similar jobs are posted to get an idea of what others are paying.

Penelope

Yes, I always tell people don't rely on just one source. If Gusto has 55K and LinkedIn has 65K, take the average and see where your pay lines up. And also think about your industry. Tech pays differently than nonprofits, even for the same title. Your city comes into play as well as your own budget. You may not be able to pay anyone at the high end of a range, but if you can't even pay them at the lower end, then you're not being competitive and you risk losing good employees.

Sabrina

You'll find a ton of free info out there, but it can sometimes be a little inflated. So this is why Penelope suggests that if you are using the free sites, you look at multiple and come up with an average. That's probably going to be as close to the actual as you're going to get without true comp survey tools. You may not be able to find info on every specific role, and that's okay because we're going to be building ranges based on role categories. So if you have data on other roles in the org that fit into the same category, you will still be able to fit that role into a range. Here's what I mean by role categories. In your organization, you have categories of employees based on how they contribute or their decision-making power. This could be coordinator, specialist, team lead, manager, senior manager, director, all the way up to executive. Whatever categories make sense for your business now and in the future. I say in the future because if you are in growth mode, you may have categories of roles that currently don't exist in your organization but will in the next year. For example, maybe the highest level of leadership that reports to the CEO right now is manager, but you know in the next year you will have a director. Go ahead and build that into your comp ranges now so that when the person is hired, you are ahead of the game in knowing what you can offer them for pay. Now that you have your role categories, you start to set ranges based on your competitive market research. When you look at your market research across roles, you should be able to find similarities in the same level. For example, marketing coordinators are likely going to be around the similar range as accounting clerks. When you think about role categories, both roles likely fall into a coordinator category. So you set your ranges big enough to fit the roles that are in the category. Let's do an example. If market research says that a marketing coordinator makes between 50 to 60K per year and accounting clerks make between 52 to 62, you could set your coordinator range, if you have one, from 50 to 62 so that both roles fit into the range. The goal is not to have a range for every job title, but every job category. But remember, the ranges are set by market research, not by what you are currently paying. Where people sit in the range is based on a combination of both experience and performance. A new college graduate is likely to come in at the bottom of the range due to lack of experience or proven performance. But someone with 15 years of experience may come in at the higher end of that range. Now, when you hire someone new, you know where to start them. When someone's performing well, you know where they can grow. And most importantly, you've created consistency.

Penelope

From payroll's perspective, this also makes budgeting easier. Instead of a manager asking, "Can we pay this new hire whatever they want?" you've already got a range. It's clear, it's predictable, and it makes forecasting raises or bonuses so much smoother. And here's a tip: don't make your ranges too wide. When you do, they lose all meaning. We have included a free download with all of our best practices for figuring out how wide certain ranges should be.

Sabrina

Okay, stay with me. I know this is going to feel like a lot, but let's break down what you'll do next once you have your data. In front of you, you'll have two things: your current pay data, where you've already highlighted pay discrepancies, like one person making more than another in a similar role. Then you'll also have your ranges based on your job categories that you just created. You're going to want to assign every employee to their job category, like coordinator, manager, director, whatever it is. Then it's a simple comparison between current pay and ranges to see who doesn't fit in their range. Are they over? Are they under? Highlight them all. Your goal is to get crystal clear on three things: who is out of range, either higher or lower; who has equity issues by being paid differently for the same role and experience; and where is there compression. Compression is when there is a small pay difference between employees with differing levels of experience, seniority, or role category. This can happen when market conditions force the starting salary of a new hire to be higher than someone who has been with the company for many, many years. It can also happen when a manager in one department is making more than a director in another. You're going to want to highlight all of that. And now that you're armed with all that data, you can meet with finance or whatever business leaders make sense in your business and sit down and map out a plan to fix it.

Penelope

And from the payroll side, you want to phase adjustments if needed. If someone is way on the range, you don't always have the budget to bump them all at once. Plan to bring them up over six months or a year. That way, payroll can spread the impact to the budget, and the employee sees you're serious about fixing the issue.

 

Sabrina

Okay, you've created your ranges, you know who your outliers are, and you have a plan to fix it. Now, what do you do? You communicate it. This is the tricky part because money is emotional, but here's the key: you want to focus on the process, not just the numbers. And yes, you do have to communicate to all employees, not just those impacted. They all talk, and if you only tell those impacted, others are going to wonder how their pay stacks up. You can just say something simple like, "We've looked at market data, we've created ranges for each role, and we're making adjustments over time to make things consistent and fair." That tells employees you're not just pulling numbers out of the air anymore. And then you sit down and you talk to each and every employee one-on-one about where they sit in the range, if any adjustments are being made to their pay, and if so, how and when.

Penelope

Final tip: we do not necessarily suggest taking money away from people who may currently be making more money than they should. But you can't cap future increases until their pay falls more into the range, or you can review their job to make sure they're not performing tasks that actually fit into a higher category. For more on what to do with outliers, read our blog post this week, which is also linked in the show notes.

Sabrina

Step by step, here is your simple plan: audit your current pay to find pay discrepancies, do a market analysis, create ranges based on categories of roles, create a plan to fix discrepancies or under/over market values, and then communicate that process clearly. That's it. That's a great first step to creating a comp structure. Is there more that a compensation professional would tell you to do around formulas and comp ratios? Sure. And I certainly don't want to underplay the seriousness of this. We are talking about pay, which is talking about people's livelihoods. But this process is enough to create a great base structure that helps you be consistent and fair until your budget allows you to work with a true comp professional. This takes the emotion out of pay and creates guidelines for all in charge of assigning pay to follow. I bet you have a few more questions, so we'll link some additional resources in the show notes, things to help you get started on your own pay audit or communicating to employees. And remember, fixing compensation isn't just about numbers; it's about building trust. If employees lose trust that their pay is fair, it's really hard to recover from that. I hope this was helpful. If you did find it helpful, I would love for you to like, subscribe, and follow. That helps us get this into the hands of more small business HR professionals who might need it. Thanks so much for being here. I'll see you next time on the HR Connection.