Defining the compensation philosophy

Business & Management
#1

A well-designed compensation philosophy supports the organization’s strategic plan and initiatives, business goals, competitive outlook, operating objectives, and compensation and total reward strategies. See Keeping Comp on Track: Some Practical Tips.

As such, most compensation philosophies define the following basic tenets:

To identify the organization’s pay programs and total reward strategies.
To identify how the pay programs and strategies support the organization’s business strategy, competitive outlook, operating objectives and human capital needs.
To attract people to join the organization.
To motivate employees to perform at the best of their competencies, abilities and skill sets.
To retain key talent and reward high-performing employees.
To define the competitive market position of the organization in relation to base pay, incentive compensation and benefits opportunities.
To define how the organization plans to pay and reward competitively, based on business conditions, competition and ability to pay.
A strong compensation philosophy is typically tied to an organization’s mission, core business, operating strategies and competitive outlook. For example, a high-tech organization, with a core business strategy to attract and retain the top professional and managerial talent in the industry to outdistance competing organizations, might adopt a pay philosophy and strategy of leading the market with its total cash compensation package or of paying higher than other organizations in the industry. See Big Companies Are Raising Wages for Lower Earners.

In another example, a warehouse, distribution and retail organization that has low employee turnover and exists in a demographically contained community with a large labor pool might adopt a pay philosophy and strategy of offering a compensation and total rewards package that is valued less than that of a similar organization located 50 miles away in a highly competitive community with labor shortages and high employee-demand issues. In this scenario, this organization adopted a philosophy of matching supply and demand conditions for its own community and set the policy to control cost. See What are the advantages or disadvantages of a lead, match or lag compensation strategy?

An effective compensation philosophy should pass the following quality test:

Is the overall program equitable? See Managing Pay Equity.
Is the overall program defensible and perceived by employees as fair?
Is the overall program fiscally sensitive?
Are the programs included in the compensation philosophy and policy legally compliant? See Conduct a Pay Equity Study to Mitigate Litigation Risks.
Can the organization effectively communicate the philosophy, policy and overall programs to employees? See Employees Rarely Understand Their Employer’s Pay Policy.
Are the programs the organization offers fair, competitive and in line with the compensation philosophy and policies?
To effectively exist and thrive in today’s competitive marketplace, many organizations realize that a one-size-fits-all strategy regarding compensation philosophy does not work. Different philosophies may be developed for different employee segments, such as “hot jobs,” information technology, hard to fill, administrative and operations. See Philosophizing Compensation.