Thought leadership

Staff Compensation: Building a Foundation

Staff Compensation: Building a Foundation
Staff compensation constitutes about 50 to 60 percent of the total operating costs of a hospital. As the single largest component of the expense budget, it gets surprisingly little attention in boardrooms and senior staff meetings. While most boards pay a great deal of attention to executive compensation, and many also devote time to physician compensation (all should!), most boards do not pay attention to staff compensation, even though it represents a higher cost to the organization. 
Surveys of HR staff have shown that nearly all organizations try to position pay for non-exempt employees at the market median or average. This is typically not an intentional compensation philosophy, but a habit that has been followed over the years without a lot of discussion. Budgets for pay increases are typically set in a top-down fashion by finance as part of the budgeting process, and not by HR as a reflection of market forces or as a thoughtful adjunct to support culture. As long as the organization is able to fill vacant positions, everyone assumes things are working well. But this kind of laisez faire approach is, at best, not strategic, and at worst, it may be harmful to the organization and its culture in any number of ways. 
This article discusses just three foundational steps in designing and administering staff compensation that will lead to a better use of scarce resources and greater employee satisfaction with pay. 
Compensation Philosophy
The foundation of staff compensation is the compensation philosophy. At a minimum, the philosophy should define who is responsible for making pay decisions, whom the organization compares itself against for recruitment and retention purposes, and how the organization intends to position pay versus the market. 
With most hospitals targeting pay at market median or average, the way “market” and how the appropriate peer group for comparison is defined becomes critically important. The market for staff-level talent is not just other hospitals in the same community. The market for housekeeping includes the hospitality industry. The market for IT jobs includes general industry. The market for maintenance workers and the trades includes construction and other businesses employing skilled tradesmen, whether licensed or not licensed. Depending on the position, the market for talent may also include universities and government services. But unless there is a shortage of applicants for a particular “hot” job, most organizations don’t give much thought to the market for talent. 
Many organizations fail to adapt their definitions of market as the competition for talent for particular jobs changes. For example, some jobs have become “virtual,” such as coders and epic/IT related positions, where continuing to rely on a localized peer group handicaps an organization’s ability to hire and retain experienced individuals. 
Periodic Compensation Audits
Every hospital’s financial statements are audited annually, but the largest cost – staff compensation – is rarely, if ever, the subject of a third-party audit. Periodic audits of compensation will confirm whether the organization is paying competitively and identify areas where it can improve. It’s like a building inspection – it can tell you whether your foundation is stable and in good repair, and show you where a little maintenance is needed and how to pro-actively prevent problems in the future. 
Markets are not static, and they do not move in parallel. If nursing pay is increasing by 3% per year, that doesn’t suggest that pay for housekeeping or cafeteria workers should increase at the same rate. A budget-driven approach to wage increases will eventually result in overpaying some jobs and underpaying others. This is not an efficient use of scarce resources. Overpaying is a waste of money, and underpaying can lead to high turnover, which has a cost, too, because the hospital spends more money on training without reaping the benefits of having experienced workers. 
An audit of staff compensation should focus on these fundamentals: 
  • Benchmarking – how are you comparing your jobs to the market for talent?
  • Peer group – what employers or industries hire people with the same skills to do similar work? Do you have data for these peer groups?
  • Outliers – how many people are paid above or below market, and why?
  • Consistency – is there internal equity between individuals in the same job? Between related jobs? Between job families?
  • Market and merit increases – how have the increases provided by your organization compared to the market over the past several years?
Periodic audits can help fine tune the budget and salary administration processes to reflect true market movement, preserve internal and external equity, and shed light on special pay practices that were begun without the end in mind and may represent dollars being spent for situations that no longer exist. These audits frequently uncover areas where current or future cost savings may be found. 
Communication Plan
There is little doubt that the way pay is positioned can have an impact on culture. But the way employers communicate with employees about pay can have a greater positive or negative impact on culture than the pay itself. It is human nature to believe we all deserve higher pay. An organization that does a good job of communicating about compensation philosophy and pay can defuse some of the perceptions of inequity and lack of fairness that will otherwise dominate water cooler conversations. 
How many of your executives can articulate the compensation philosophy for employees?How many of your managers can do it? Simply having the conversation can help employees understand that pay is not haphazard; there is a structure that seeks to be fair and consistent. Without the discussion, employees will be left to their own opinions regarding how fairly they’re paid. 
Many managers are hesitant to talk about compensation philosophy, either because they don’t understand their own pay, or they’ve received increases that are larger than those their employees receive. However, there is nearly always a positive story to tell about pay, and HR can encourage the discussion by creating talking points for managers, or directly assisting in conversations where managers need help. Besides communicating the compensation philosophy and emphasizing fairness and equity, these are some key points organizations should communicate each year before wage adjustments occur to help employees appreciate the investments being made in their compensation: 
  • How many people are getting wage increases
  • How wage increases also increase the value of benefits
  • The total dollar impact of pay increases for workforce as a whole
This article has outlined three foundational steps in creating a sound staff compensation plan that uses resources wisely and encourages employee understanding of pay. By being intentional about setting a compensation philosophy, conducting periodic audits to assure you’re doing things properly, and communicating with employees, you can improve the likelihood that the impact of pay on your organization’s culture is a positive one.
Craig Strom


Craig Strom is a Principal Consultant & Senior Advisor with the Total Compensation and Rewards service line of Integrated Healthcare Strategies, a part of the Gallagher Human Resources & Compensation Consulting practice.

Mr. Strom's work centers on auditing and designing executive, management, and staff total compensation programs at not-for-profit healthcare organizations. He routinely works with a broad spectrum of organizations located across the country, ranging from some of the largest integrated delivery systems and ...

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