Your compensation philosophy--written, unwritten, or unknown—drives your organizational culture. It doesn’t matter if you pay for performance, loyalty, or effort—it defines how you value employees and what they do. You get what you pay for.
The latest annual Payscale reported a chasm between perceptions of employees and management. Only 20% of employees think their pay is fair, but 44% of employers do. What causes us to pause is wondering what the 56% of companies who say compensation isn’t fair are doing about it. Do they publish a compensation philosophy and strategy? Are they reviewing their compensation plans?
A WorldatWork survey reported that over 90% of companies have a compensation philosophy, but only 53% of their employees understand it. Only 63% have their philosophy in writing. As McCloud would say, “There ya go.” For decades, we have been reading reports that employees don’t trust their leaders. That makes sense to us. If they don’t understand their pay, they won’t believe managers who say it is fair.
If you want to create a culture of trust, compensation is an excellent place to start, and the place to begin is a clear, concise, and transparent compensation philosophy.
There is no “right” way to define your philosophy, strategy, and policies. Every organization will be different. The following are a few general guidelines to help you get started.
Before you begin a compensation review, use feedback tools and your people analytics team to understand what motivates your people. Benchmark surveys are useful food for thought, but they won’t tell you what your people want and what your business needs.
A compensation philosophy explains one or two short paragraphs how your organization views employee compensation. It explains why the philosophy is what it is and explains how the business strives to achieve consistency and fairness. It explains the competitive market position and how the company balances competitive position, talent needs, and ability to pay.
The philosophy should reflect the organization’s purpose and mission. Express it in general terms, so it does not need major revision when you need to change a strategy.
Employees will see through an evasive message. A philosophy that doesn’t reflect current practices will require a statement about addressing the disconnect.
If you can’t pay market rates, as often happens in non-profits, explain why.
Philosophy is the mission and purpose; strategy is the execution. Plans may change frequently, and a change may trigger a compensation review.
Create the compensation policy in the same manner as other directives. This is the document that puts the philosophy into play. It provides the framework for the compensation strategy and pay plans.
It won’t matter how well you construct your plan if employees think you are concealing information. We know few organizations have achieved the level of trust where they can publish every person’s job, grade, and salary, but you can explain how decision are made.
Write your communications and directives in plain language that anyone can understand. If you need to, get help from your Marketing writers or hire a professional. The language should be no higher than an 8th grade level on the Flesch-Kincaid readability scale. Many managers have difficulty communicating compensation decisions to their employees. Make yours so easy to understand they don’t need explanation.
We recommend you implement an instant feedback tool if you haven’t already. There are many options available, and you can embed them in the tools your employees use every day. Encourage every executive leader to take part in answering questions. That conversation will open lines of communication you never thought possible.
Your organization’s management style and values drive pay ranges. Hierarchical organizations use many narrow grades while a team-based flat organization may have very broad bands.
If you don’t align your compensation programs with your pay philosophy and strategy, your workforce will not be aligned to your company.
In a previous article, we wrote about how compensation philosophy, policy, and strategy drive organizational culture. Our main point was that transparency and open communication will drive a culture of trust.
Executing the strategy requires the same transparency and openness. People want to know about the mechanisms you use to value their jobs and reward performance. If they don’t have the answers, they will make assumptions based on how much they trust management.
Putting the compensation strategy in place requires a framework to define how your organization benchmarks
market rates, aligns pay ranges to the market, establishes the value of jobs, and manages equity across the organization.
Most organizations benchmark pay against market rates using compensation surveys, BLS statistics, and online companies that collect data from employees. These studies enable you to evaluate market trends and labor availability based on two assumptions:
Using these data sources enables you to compare your current pay with market rates to help pinpoint areas where pay rates may make it difficult to attract the right talent. Or, you might overpay for skills that are no longer scarce. These data also enable your compensation team and business leaders to make better decisions about resource allocations and your competitive position.
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Pay structures give you a way to match compensation to market rates, manage costs, and handle the complexity of compensation planning.
Ranges enable you to decide how you will lag, match, or lead the market. For example, your philosophy might be that to be a competitive leader, your company will lead the market by 15%. This means that the midpoint of the pay range will be market + 15%, and that a performing, seasoned employee should be at or above the midpoint.
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Job structure or job leveling is the process of evaluating positions to determine their value to the organization, and it is the primary tool for determining job equity.
Creating a common language and comparisons across the organization make internal movement easier. For global organizations, a consistent structure across the organization makes career mobility easier, where companies can institute career paths that cross boundaries.
Most organizations use several of these methods for different employee groups such as executives, and different methods for union and non-union employees.
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Consistency, transparency, and communication are the main components of a successful compensation program. When it comes pay, conversation matters more than cash.
Thinking logically, using merit pay to reward high performers and encouraging low performers to leave or improve should work. But after decades of using merit pay to improve employee performance, the industry consensus seems to be that merit plans don’t improve employee engagement.?
In spite of all the recent noise about the ineffectiveness of merit pay plans, we see a different problem. The fundamental issue, as we see it, is when the real purpose of a pay increase is disguised as merit pay.
As in most human endeavors, the original principles of merit pay get lost during the implementation, or over time as routine procedures lose their purpose.
None of these issues negate the principle of merit pay, and with careful planning and diligence, you can overcome each one of them. But for most organizations, a little tweak here or there won’t solve the issues. It requires a fundamental, strategic, organization-wide approach.
Finding the right mix of incentives to drive performance and retain talented employees requires an open dialogue. Consider your communications carefully to develop the kind of trust that fosters effective two-way communication.
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