Craft a Compensation Philosophy Lay the groundwork for compensation that is competitive, cost-effective, and brand-aligned . 1
Executive Summary A well-designed compensation philosophy is the foundation of an effective compensation strategy. • Employee compensation often comprises in excess of 70% of an organization’s ongoing operating expenditure, yet few organizations have plans in place to properly direct and control this expenditure. • The first step in compensation planning is the development of a compensation philosophy that clearly articulates the organization’s high-level approach to pay for each of its employee segments, including its target competitive position. A compensation philosophy should be primarily driven by business strategy and objectives. • A compensation philosophy should include: compensation objectives, current structure, basis of job value, focus of variable compensation, approach to raises and promotions, competitive intent for each employee segment, and approach to administration. • These building blocks will help you to create employee segment plans that are legal, culturally-aligned, and designed to support organizational goals. Saying you have “competitive compensation” isn’t enough – articulate your competitive position. • “Competitive compensation” is a vague term that is generally used to indicate that an organization pays at or around the midpoint of the market (P50) for base pay, total cash compensation (base + variable pay), or both. • A compensation philosophy needs to be specific in order to effectively direct compensation practices; it needs to specify the target approach (lag, match, lead) and the target market position it desires for each employee segment. o Note: The approach and/or the specific percentile target may be invisible to employees. It depends on the desired degree of pay transparency. 2
Understand the Total Rewards model before beginning the compensation design process This blueprint focuses on the base and variable components of Total Compensation, often referred to as Total Cash Compensation (TCC). Base Pay Total Compensation Benefits Total Rewards Variable Compensation Performance & Recognition Learning & Development Short-term Long-term Incentives Incentives Culture & Work Environment 3
A compensation philosophy is the first building block – every other element of your compensation strategy depends on it This set will focus on the development of a Compensation Philosophy based on business strategy, business lifecycle, laws and Compensation Policy regulations, culture, industry, and workforce composition and demographics. Compensation Plans by The Compensation Philosophy will outline the organization’s target Employee Segment market position and its total target compensation (TTC), which will drive the selection of total compensation elements – base, variable, and Compensation Philosophy benefits – for each employee segment. Executive compensation is often considered to be a competitive-positioning document. As a result, details of the target market position is seldom included in the organization-wide Compensation Philosophy and specific plan details are seldom included in the Compensation Policy. If this is the case in your organization, be sure to document these details in the Executive Compensation Plan. 4
Make the Case What’s in this Section: Sections: • Business factors and HR trends that are driving the Make the Case need for compensation planning. Develop a Compensation • The risks of not implementing a compensation plan. Philosophy • Common objections to, and challenges of, compensation planning. 5
Today’s competitive business climate means organizations need to take a strategic approach to compensation planning Since employee compensation is the biggest expense in nearly every organization, compensation philosophy is a high return HR activity. Win the war for talent in an improving economy: • Even during economically challenging times, the right talent can be hard to come by because of small talent pools, skills scarcity, inter- business competition, and/or remote geographical location. • Organizations need to effectively use compensation offerings to: 1. Define the employer brand to attract talent and set candidate expectations. 2. Engage and retain their current employees. Control ongoing costs in a competitive era: • Compensation is the number one operational cost in any organization, often in excess of 70% of total expenditures. • In an era of increased global competition, knowing where the money is going, justifying that spend, and being able to project long-term costs is crucial to the long-term fiscal health of the organization. 6
Establish a Compensation Philosophy to guide compensation management and overcome compensation challenges Is it challenging to determine compensation level for a new hire ? Is determining compensation level for a promotion difficult? Is it difficult to explain the reasoning behind relative compensation decisions? Do employees constantly speculate about how they are paid in comparison to their peers? Do department managers report that they are hearing staff complaints about compensation? Does compensation frequently show up as a primary departure driver in exit surveys and/or exit interviews? Is organizational turnover higher than historical norms and/or industry benchmarks and you have reason to believe that compensation is a contributing factor? If you are experiencing some or all of these compensation issues, you are not alone. Setting compensation that is fair, competitive, and cost-effective is tricky and requires careful thought and planning. 7
Without clear direction, it’s easy for compensation to go off-course Compensation issues can easily become organizational issues. Stop them with a clear Compensation Philosophy that guides pay decision-making. Compensation issue: Common organizational issues: Compensation is too low; other organizations • Inability to recruit people with needed skill sets in your labor market are offering compensation packages • Inability to engage current employees that are more attractive. • Inability to retain high value employees Compensation is inequitable; employees are paid • Inability to engage current employees differently for the same job and there is no apparent • Inability to retain high value employees rational justification. • Vulnerability to high cost discrimination claims Compensation is too high; other organizations • Turnover that is too low, which can lead to stale in your labor market are offering compensation packages ideas and/or the retention of employees with a that are much less attractive. poor organizational fit Pay inequity is the basis for most compensation-related discrimination claims. As a result, it is good practice to evaluate the internal equity of your compensation practices on a yearly basis. 8
Organizations with an up-to-date compensation philosophy are 1.9 times more likely to experience compensation success Despite its correlation with Despite its correlation with Survey Findings: compensation success, only 26% of compensation success, only 26% of • Of organizations who currently organizations have an up-to-date organizations have an up-to-date have no philosophy, those that compensation philosophy. compensation philosophy. 80% Compensation strategy success intend to create one are experiencing less success 70% 76% 71% (26%) than organizations with 60% no intent to create one (35%). This is likely because 50% compensation-related issues (i.e. 51% 40% low success) have prompted them to invest effort in developing 30% 35% a compensation philosophy. An organization is 96% more likely to An organization is 96% more likely to 20% 26% experience compensation success if it is experience compensation success if it is • Of organizations who have a in the process of developing a philosophy in the process of developing a philosophy 10% philosophy in place, those with an rather than just planning on it. rather than just planning on it. out-of-date philosophy are almost 0% as likely as those with a current No philosophy, No philosophy In the process Have an out-of- Have an up-to- philosophy to experience but plan to and no plan to of developing a date philosophy date philosophy compensation success. This create one create one philosophy makes sense if the philosophy is deemed “out of date” because of its age rather than because it is no longer aligned with business Compensation philosophy: stage of development strategy or characteristics. Source: McLean & Company, 2012; N=62 9
Develop a Compensation Philosophy What’s in this Section: Sections: • Key internal and external influences on the Make the Case compensation planning process. Develop a Compensation • How to deliver a compensation philosophy Philosophy development brainstorming session. • Key themes and elements of a strong philosophy. • A compensation philosophy template. 10
Recommend
More recommend
