When to Make an Exception to the Compensation Rules and How to Build a Business Case

It’s OK to be cautious when it comes to making compensation exceptions for individual employees.

You work hard to strike a balance between internal equity and market competitiveness, and exceptions to the rule can feel like a slippery slope. 

After all, what if you set a precedent and disrupt the balance you’ve worked hard to achieve? Could it lead to dissatisfaction and perceived inequity among the workforce?

Yet, there are often circumstances where exceptions are strategic and even necessary in helping you attract and retain talent in an increasingly competitive market. So when and how should you say ‘yes’ to an exception?

Let’s take a look at exceptions and how they should be approached, justified, and systematically managed.

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Determining When to Make an Exception to the Compensation Rules

Maybe you have a candidate who’s looking for a bit more than you’d planned for the role. Or perhaps you have a high performer who isn’t quite ready for a promotion but who could easily command a higher salary elsewhere.

The decision to make a compensation exception involves weighing multiple risks, including the potential impact on team dynamics, your budget, and the precedent it sets for future compensation decisions. 

Remember, a well-defined pay philosophy is crucial as it guides when and how to make compensation exceptions, ensuring fairness and competitiveness. This means it is important to define the specific situations where exceptions may be warranted. 

These could include where unique skills are in high demand but scarce, or when a role critical to business operations has remained unfilled for an extended period, or when roles have seen significant evolution in required skills or responsibilities due to market changes or shifts in business strategy.

A few ‘alerts’ to look out for that might indicate you need to make comp exceptions include:

• You’ve had multiple people in the same team leave the organization
• You’re hiring for a role that has become more technical
• You need to accelerate business growth with a more senior employee

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For instance, Alex Michalowski, Head of Total Rewards at Zscaler, notes, "In cases where roles remain unfilled for months due to evolving skills, changing market pricing, or shifts in business strategy, creating a comp exception could be warranted."

Market competitiveness plays a crucial role in these decisions. Companies must balance the need to offer competitive packages to attract top talent with the imperative to maintain internal equity. 

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Leveraging Data and Analytics for Compensation Exception Decisions

Leveraging data and analytics is essential for putting your team in a position to make exceptions intelligently. You want to make informed decisions based on market rates, internal compensation structures, and the specific contributions expected from the role in question.

Some of the data points to look at when considering making a compensation exception include:

• Duration the role has remained open
• Number of offer rejections
• Reasons behind offer rejections
• Turnover rate among high performers
• Stated reasons for high performer turnover
• Market compensation data
• Internal compensation data

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You should also implement ways to track the reasons behind any exceptions you make, whether it be for new or existing employees. This helps ensure that each exception is based on a comprehensive understanding of when and how to make justifications. 

“Leveraging data and analytics enables organizations to justify comp exceptions based on objective criteria, ensuring fairness and alignment with market standards,” states Alex.

If you’re in the process of managing a compensation review cycle, it’s important to compare the employee’s compensation against your equity and salary bands to help identify how much of an exception would be needed or whether there is an opportunity to move them into a higher band with greater responsibilities.

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Making the Business Case for a Compensation Exception

When the need for a compensation exception arises, it is typically the responsibility of managers to initiate the justification process, often in collaboration with Human Resources (HR) and compensation specialists. Your role as an HR leader is to partner with managers to ensure that the case for an exception is grounded in solid business rationale and aligns with the company's compensation philosophy. This involves an analysis of the role's market value, the candidate's unique contributions, and the position's strategic importance to company goals.

The decision-maker in these scenarios is often a senior leader or a committee designated to oversee compensation practices, ensuring that exceptions are made in alignment with the overall compensation strategy. 

When approaching decision-makers, it is best practice to include the following: 

• A well-documented case that articulates the business need
• Clarification on the risks of not making an exception
• The projected return on investment/outcome of hiring/retaining the employee in question

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If you’re building a business case for a talented employee, giving them a “stretch assignment” to bolster the case can be helpful.

By assigning tasks that test and expand their skills—whether through managerial roles, global projects, or temporary relocations —employers can evaluate an employee's potential and readiness for higher responsibilities and compensation. Successful completion of such assignments demonstrates the employee's value and potential to the organization and justifies the need for an exception to standard pay bands, providing a clear rationale for rewarding their exceptional contributions.

“When you're dealing with a consistently top-performing employee, securing that talent is so important. Managers, HR Business Partners, and compensation teams need to understand this individual's unique skill set and what they'll require for future roles. Tasking them with a stretch assignment—be it stepping into a leadership role or taking on a global project—to gauge their potential and readiness for advancement is a great way to build a business case for an increase or even to offer them a spot bonus for their efforts,” says Alex.

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Being Systematic About Compensation Exceptions

To maintain transparency and trust, documenting and communicating compensation exceptions is paramount. 

You should prepare to:

• Conduct regular reviews of exceptions made
• Analyze their impact on pay equity and budget
• Ensure that all decisions are backed by data and aligned with the company's compensation philosophy. 

Training for all involved managers and leaders on fair decision-making processes and the strategic rationale behind compensation exceptions can further reinforce trust and understanding across the organization.

Moreover, a systematic approach to exceptions should involve clear reminders and guidelines on when exceptions can be considered, who approves them, and how they are communicated within the organization. This ensures that exceptions are not arbitrary but are instead strategic decisions made in the company's and employees' best interests.

“The more openly you communicate about pay practices and exceptions with employees, the deeper their long-term commitment to the company becomes. They recognize and appreciate that extra mile you've gone to clarify their current standing within the organization,” says Alex.

While compensation exceptions present challenges, they also offer opportunities for organizations to strategically manage their talent in alignment with business needs and market dynamics. Companies can effectively navigate the complexities of compensation exceptions by approaching these decisions with a balanced view of risks and benefits and leveraging all available data.

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If you want to improve your organization’s total compensation analysis, check out Aeqium’s Total Compensation Insights & Analysis tools today.

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