“The value of an employee depends on the time that can elapse without any inconvenience, between an exceptional effort on their part, and the remuneration for this effort” – Camille Cavallier, company manager.
In a competitive job market and as the war for talent rages on, compensation continues to play a fundamental role in the recruitment and retention of talent. The compensation mix is a management tool available to HR managers which aims to optimise a company’s compensation strategy to better manage costs, increase performance and facilitate the development of human capital. In the following article, find out what the compensation mix is and how to use it in your compensation strategy.
Compensation is a clever mix of various components!
Using different criteria, the compensation mix adds up all the components forming part of the total compensation of a single employee, of certain groups in a company or of all the staff to provide precise knowledge of HR expenses. This allows HR managers to identify indicators which have not been clearly valued (as is sometimes the case with social security benefits), those which contribute to the attractiveness of a company, but also to adapt the compensation to certain groups in the company to enhance their strategic function in the organisation.
Defining the best compensation strategy
The ultimate aim of the compensation mix is to find the best compensation structure that will enable the recruitment and retention of the best skills while meeting a company’s economic performance objectives. By prioritising, for example, one particular incentive compensation criterion for certain groups of employees in the company over others, the HR manager rebalances the distribution of the total compensation package taking into account strategic factors. He can also use the compensation mix to identify reversible compensation components and thus adapt more easily to the economic fluctuations of the company without neglecting its attractiveness factors. (To find out how today’s HR managers can support a company’s business objectives and challenges, I recommend reading the article “Why do HR managers have an important role to play in your incentive compensation strategy?”.)
Direct compensation, the first component in the compensation mix
Identify the qualifying salary and performance salary
Each employee receives a fixed salary which is freely determined between the employer and the employee although it is generally governed by several factors: there is first of all a legal obligation to observe the minimum wage in France, but it is there may also be obligations related to branch agreements or to a certain level of qualification. A company may also define a higher fixed salary itself, depending on its internal positioning in relation to the value of certain functions or skills in the company. Finally, the fixed salary is adapted to the market to make the company more competitive than its competitors.
All of these make up the qualifying salary.
Performance salary is then identified, which takes into account fixed or incentive compensation criteria (individual or collective) to reward performance. For instance, there may be increases and bonuses based on objectives. The performance salary in itself is not compulsory but it plays a key role in the recruitment and retention of talent.
The direct remuneration of an employee also depends on their seniority in the company, or on specific characteristics linked to their position such as financial compensation because a position is particularly challenging, for example.
Fixed compensation is therefore influenced by legal, strategic, individual and collective criteria and although it is transparent and calculated on the basis of objective criteria, for the same job, it may vary from one employee to another. The compensation mix thus identifies the actual direct compensation of each employee. (What does the law have to say about the implementation of incentive compensation? To find out about the legal regulations governing incentive compensation systems, I would encourage you to read the article “Incentive compensation: the employer’s obligations towards their employees”.)
The other means of compensation constitute the peripheral compensation
All compensation criteria that are not direct constitute peripheral compensation. It is at this level that compensation components are increasingly difficult to identify, such that it is sometimes forgotten that every benefit has a cost and that this cost must be valued.
The legal elements of compensation
Legal profit-sharing, incentive schemes, employee savings plans, employee share ownership and stock options are so-called “legal” peripheral compensation elements. This means that although they are not necessarily compulsory (depending on the size of a company, for instance), their allocation, valuation and payment depend on a legal framework. For example, the amount allocated to profit-sharing may not exceed 20% of a company’s total gross salaries, while the allocation of shares gives the employee the status of a company shareholder and allows them to participate in certain company decisions.
Benefits in kind
Then there are elements of gratuity granted in kind, such as having accommodation or a company car and having a mobile phone at one’s disposal. These elements can be negotiated during a job interview. They are reversible, but once they are stated in the employment contract they cannot be withdrawn without equivalent financial compensation, hence the need to determine them in the compensation. (What incentive compensation clauses should be included in your employees’ contracts? To find out what problems to anticipate when establishing the rules in the employment contract, I recommend reading the article “Incentive compensation: which clauses should be included in your employees’ contracts?)
Social security benefits
The final component of peripheral compensation concerns social security benefits. The impact of certain social security benefits on compensation is clear in terms of meal tickets, company insurance and transport refunds, but other elements are less easy to spot. This is the case, for example, when a company grants discounts to staff for the acquisition of company products or when it puts on events for the benefit of employees. It should be noted that social security benefits are shared and that all employees benefit from them in the same way.
The compensation mix aims to measure all these compensation elements, whether direct or peripheral, to determine the real human cost in a company.
Whether individual, targeted or collective compensation, it’s all about positioning!
[… Employee savings are a means […] of improving a company’s competitiveness by establishing a “win-win” relationship (“Employee savings,” Ministry of Labour, Employment and Economic Inclusion).
Companies use the compensation mix to identify accurately the compensation components constituting each individual salary and to differentiate them from the targeted compensation components which are only intended for certain groups in a company, or to differentiate them from the collective components which concern all employees. It thus reinforces companies’ remuneration strategy with the help of specific positioning.
Incentive compensation rewards performance!
Granting an incentive compensation bonus to sales representatives is a form of targeted compensation which only concerns one group of employees in a company. What is the purpose of such bonuses? They reward short-term performance and encourage these employees to commit to their strategic commercial function.
Social security benefits make a company more attractive
Conversely, social security benefits are collective components and mobilise the commitment of all employees. These compensation components strengthen the employer brand of a company and allow it to differentiate itself from competing companies on the job market to increase its general attractiveness.
Direct compensation must remain consistent
As regards the elements of direct compensation, companies must succeed in positioning themselves in the employment market and offer consistent salary schemes according to employees’ level of competence and individual experience. Direct compensation is a form of company recognition for the individual commitment of each employee and contributes both to the personal development of employees and to the economic development of a company.
By identifying all the components of the compensation mix and using them to serve the organisation, companies can best manage their remuneration strategy and find the perfect blend!.
