The Compensation Philosophy Conversation

In my experience, there is nothing quite like getting leaders around a table (literally, if you can manage it, and figuratively, if you cannot) to debate what they intend the organization to accomplish with its compensation dollars - and then committing their agreement to paper - to bring clarity to reward design and administration.  This is the exercise we like to call setting compensation philosophy.

Beyond the trick of actually pulling the right people together for the conversation (What? Spend an hour of our monthly meeting time to talk about priorities for what is likely our single largest expense item?), there is the question of what content a compensation philosophy discussion should cover.  Below are some examples of the types of questions I have found most helpful.  I would invite readers to chime in with their own thoughts and opinions.

Business Anchors and Objectives

For me, these are the most important, highest payoff questions because they help define top organizational priorities and illuminate the opportunities for alignment between reward spend and business success.  Of course, teasing them out is not always as straightforward as it should be.  As noted in a recent Harvard Business Review Daily Stat, many executives (49% of those surveyed by Booz and Company) say their companyies don't even have a defined list of strategic priorities.  Push hard here; you could be doing your executive team a big favor.

• What are the organization's most important business and operating objectives right now?  How might those change going into the future?
• What do you see as the biggest challenges the organization will face in achieving these?
• What major threats and opportunities might lie on the horizon for the organization?
• Given the above, what should our top objectives for compensation - rewards - be?

Reward Elements and Their Purpose

I also find it helpful to parse out the different pieces of the overall reward package and to define their purpose and role in the overall "portfolio".  This helps us identify any gaps or "double dipping" that might exist among current offerings.  Don't overlook items outside cash rewards that might be important differentiators for your organization.

• What different elements or programs are part of your overall reward program?
• What is the purpose of each?  What role do they - should they - play in accomplishing your objectives?

Competitiveness

I believe it is important to define what competitiveness means for your organization.

• Who do you see as the organization's key labor competitors - from where do you recruit people and against whom should pay practices be set?
• At what level should salaries, cash compensation and total rewards be set relative to this competition?  At median/average levels? Somewhat higher or lower?

Job Valuation

I think it is important to be clear about the primary method used to establish job value, whether that be external market pay practices or some internal (e.g., factor-based) evaluation approach.

• Which of the following should play the primary role in determining relative job value within the organization -- external market practices or internal job relationships?

Pay for Performance

I often find that pay for performance objectives and intent is articulated in the first two question areas (Business Anchors and Objectives,Reward Elements and Their Purpose).  Nevertheless, this is usually important enough to warrant its own distinct focus.  It may be helpful to ask these questions both at the level of each reward element (i.e., salary, annual incentive, etc.) and for the overall package.

• To what extent should compensation reflect performance?  Dramatically? To a slight degree?  Not at all?
• What level of performance should be considered?  Individual? Work team/group/department? Business unit?  Organization wide?

These should at least help you get the conversation started.

What would you add to - or change in - the above list of compensation philosophy questions?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and is a bookhound and aspiring cook in her spare time.  Follow her on Twitter at @annbares.

Creative Commons Image: "ThinkingRIFD" by @boetter

Comments

[Dan Walter]

Hi Ann,

This is a great summary of a complex process. I would only add, at the very beginning, that having an understanding of "who" the company is and how they want to be viewed by current and potential employees is often a critical step.

Regarding Reward Elements and Their Purpose: I fine it sometimes helps to discus this portfolio in the same way a financial advisors discuses the personal portfolios of the executives. Again, short and long-term objectives are critical, as are an understanding of how an why each potential compensation instrument works.

[Ann Bares]

Great additions and suggestions - thanks Dan!

[E. James (Jim) Brennan]

Compensation Audit Category Area
1. Competitiveness
2. Pay for Performance
3. Internal Equity
4. Government Compliance
5. Cost Control
6. Communications
7. Turnover
8. Cost Effectiveness
9. Concern for Employees
10. Administrative Ease

Each category is followed by three choices to be made re PERCEIVED OBJECTIVE OR POLICY, Relative Importance and ACTUAL PRACTICE.

Here is an example of the column section choices for Competitiveness:
(check one per category)

PERCEIVED OBJECTIVE OR POLICY
Overall, we intend to pay our employees...
1. low, just enough to attract/retain
2. generally competitive rates
3. high, much more than most

Relative Importance
1. low
2. medium
3. vital

ACTUAL PRACTICE
Overall, we pay our people...
1. low, just enough to attract/retain
2. generally competitive rates
3. high, much more than most

Part of the instructions read:

Your anonymous answers to this questionnaire will help us determine the compensation philosophy of your organization, how the actual practices meet those goals and objectives, and what is needed to close any gaps while maintaining programs that are already working well. All comments you make will be confidential. Your statements will be summarized with those of other participants in a formal report. No information on “who said what” will be included, nor will any comments be quoted in a way that could identify the respondent. Once the formal report has been written, any worksheets identifying individual responses will be destroyed.

If the range of suggested answers do not adequately describe your opinion or understanding, feel free to add your comments on this form or on an attachment, referencing the category name or number covered in your additional response. This is not a test, so there is no “right” answer. We want your opinion, your best guess or your general understanding. Each time you encounter three choices, please select one.

[Ann Bares]

Thanks for sharing your protocol here, Jim - helps flesh out content and process in more detail!