Lump Sum Payments
A lump sum payment is a one‐time payment an organization gives to an employee instead of a base pay increase. Lump sum payments are almost always given when an employee is paid above the maximum of their salary range as a substitute for a base increase, allowing for the market to catch up with the employee’s pay. More than half of companies use this practice, according to the Buck Consultants’ Compensation Planning Survey.*
The formula commonly used by compensation professionals to assess the competitiveness of an employee’s pay level involves calculating a comparative ratio, better known as “compa‐ratio". The compa‐ratio is calculated by dividing the employee’s current salary by the current market rate (typically the midpoint of the employee’s salary grade), as defined by the company’s competitive pay policy.
When should you give an employee a lump sum payment? Suppose John’s annual salary range is between $40,000 and $60,000. That means the mid‐point for John’s salary range would be $50,000. Many organizations keep their employees’ compa‐ratios between 80 percent and 120 percent. Suppose also that John makes $65,000. That would give John a 130 percent compa‐ratio, which is outside of the normal range.
A Lump Sum Payment Saves the Day.
Let’s say John is eligible for a 3 percent annual increase, making his new salary $66,950. Let’s also say that, for this year, the salary ranges are adjusted upward by 3 percent because of inflation and other market conditions. The new midpoint for his range would be $51,500, keeping John’s compa‐ratio at 130 percent, well over the midpoint of his range from a dollar standpoint.
Lump sum payment to the rescue! Instead of perpetuating John’s situation, let’s not give him the 3 percent ($1,950) increase. Instead, let’s give him a $2,000 lump sum payment. John is happy with the cash and his compa‐ratio drops to 126 percent. Follow that same process for three years (allowing annual adjustments to the salary range to catch up) and John’s compa‐ratio is going to drop back into the healthy range. At that point, John’s annual increases can begin again.
You might ask, don’t we run the risk of losing John if we don’t give him an increase? Perhaps, but it isn’t likely. Consider these two things:
1) Surprisingly, while pay is one of the factors that causes people to leave their jobs, it isn’t one of the most important. Keep an eye on John’s relationship with his manager, his role clarity and job satisfaction, and you’ll stand a much greater chance of retaining him.
2) What would happen if John did start looking for a job? If he went to the office next door, what would the pay range be? If you and the company next door both did your homework, your ranges would be the same! Would the other company start people at a 130 percent compa‐ratio? Probably not. John is not likely to find another company that would pay him as much for the same job, and even though compensation isn’t a top factor in deciding to stay at an organization, it is a primary factor when picking a new employer.
What if a lump sum payment just isn’t right for your organization? Consider this alternative.
Maybe John makes more money because he has actually taken on responsibilities outside of the position’s normal duties. If that is the case, perhaps it makes sense to make him a “Widget Manager Level 2” instead of his current “Level 1” position. If this move is justifiable, then place that new position in a higher salary grade and, thus, a higher pay range. Caution: Be careful to not create a new position if it isn’t justified. It will be more trouble than it’s worth!
One other item to keep in mind … messaging, messaging, messaging. It’s imperative to communicate compensation‐related messages in a correct and consistent manner to your employees.
This is where Compease comes in. Compease is a comprehensive, web‐based salary administration program that provides the tools, information and consulting expertise an organization needs to manage employee compensation with ease, accountability, and confidence. Compease implementation includes a full compensation analysis from our Certified Compensation Professionals and consultants, who will present compensation messaging to many levels of the organization. If you don’t yet use Compease, you may want to see if your current provider can help with that.
Keep in mind that the above situation refers to formalized bonus payments across an organization. Discretionary bonuses can also be used to incentivize team members. Be sure to pay those out in the right way and to individuals in the right roles. Research shows not everyone is driven by these types of bonuses, so be conscientious in your strategy.
Remember that the ability to make good decisions about compensation begins with having accurate pay ranges and pay grades.
Ready to have someone help you master that portion of your business? Great, because we are ready to help.
Find out more about Compease here!
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