I firmly believe that every company should have a written compensation philosophy that guides the design of its pay structure. For example, whether it will pay employees below, even with, or above the market.
A pay philosophy helps HR develop pay practices in support of the goals/objectives and overall business strategy of the organization. It lays the groundwork for developing a written compensation strategy that details how compensation plans and programs will be designed and implemented.
Paving the way
Though HR often leads the initiative to create a pay philosophy, it’s important to not create it in a vacuum so senior management as well as HR should be included in its development. Let’s face it; getting comments on the front end facilitates cooperation down the road. Aside from that, given that management plays a key part in implementing any comp plan, at the very least, senior management should have a role in developing the comp philosophy. Whether other organizational levels are included in that process is one of the decisions for HR and senior management to make.
A thin line
Separating comp philosophy from comp strategy can be tricky and the line between is often blurred, with a philosophy statement drifting into a strategy statement before you know it. It may help to think of comp philosophy as a broad statement of what the organization will do with regard to compensating employees and a comp strategy as a more detailed statement of how compensation plans will be structured and implemented. Both are easier said than done, however, so BLR provides a basic template to help you get the ball rolling.
A compensation strategy comprises a number of elements including statements about formal decisions about everything from the timing of payroll periods to who has the authority to make salary decisions. A good place to start is to develop a salary administration policy. It can be simple or complex but, as a general rule, includes:
- The reason for the policy
- The objectives of the policy
- Who will do what about salary administration
- How salary changes will be made
- How payroll will be administered
- Who in the organization has authority to make hiring decisions
- Who in the organization can make exceptions to established salary guidelines
As HR and senior management develop a salary administration policy it allows them to make decisions that prepare them for the compensation hurdles they’ll encounter as the business grows. It also helps to ensure that one-off decisions don’t undermine the organizations comp philosophy and/or strategy.
Other comp strategy elements include statements about types of compensation (cash and non-cash), comp review guidelines, base salary management, performance measurements/ratings, salary increases, and incentive pay (individual/organization goal achievement, organization financial health, and accountability), and, if applicable, job grade structure.
Let’s sum up
There really is no right or wrong comp philosophy or comp strategy, though there are some better or maybe some less effective ways to draft those documents. The worst way, however, is to not create either one of them. That inaction leaves an organization open to unnecessary risk and can open the door to some sticky employee relation issues.
Comp philosophy/strategy resources:
- What’s Your Market Position
- 8 components of an effective employee compensation plan
- Compensation Strategies: How to Build a Market-Competitive Salary Structure that Retains and Attracts Your Best and Most Productive Employees
- Creating Your Compensation Strategy Document
- Executive Compensation Strategies: How to Stay Current, Compliant, and Ahead of Your Competition
- Sales Compensation Strategies: How to Motivate and Re-Energize Your Staff in the New Economy