The Compensation Philosophy Conversation

There is nothing quite like getting leaders around a table (literally, if you can manage, virtually if not) to debate what they intend the organization to accomplish with its compensation dollars - and then documenting the points of their agreement in writing - to bring clarity to reward design and administration. 

Beyond the trick of actually pulling the right people together (What? Spend an entire hour to talk about priorities for what is likely our single largest expense item?), there is the question of what the content of this discussion should be.  Below are examples of questions I have found helpful.  You may have better ones; please chime in with your own favorites.

Business Priorities, Objectives and Values

For me, these are the most important, highest payoff questions. because they help define critical organizational priorities and illuminate opportunities for alignment between reward spend and business success.  Of course, teasing them out is not always as straightforward as it should be.  According to one survey, many executives (49% of those surveyed) say their companies don't often have a defined list of strategic priorities.  Push hard here; you could be doing your executive team a favor. (More on reward SWOT analysis here.)

• 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?
• What unique organizational values and cultural norms must play an important role in how employees are rewarded and pay dollars allocated?
• Given the priorities suggested from the above, what should our top objectives for compensation - and/or total 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 gaps or "double dipping" that might exist among current offerings.  Don't overlook items outside cash rewards (such as work environment) 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.  And, increasingly, it may be important to consider a move away from "one size fits all" competitive positioning.

• 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? Higher or lower?
• Are there situations (e.g., functional areas, skill/experience sets, etc.) where a different competitive strategy should be considered (such as mission-critical roles or in response to labor market supply/demand challenges)?

Work Valuation

I think it is important to be clear about the primary method used to establish the value of work and jobs, 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 value of work and/or jobs within the organization -- external market practices or internal job relationships?

Pay for Performance

I often find that pay for performance objectives and intent may be articulated in the first two question areas are.  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?
• Should this be the same for all employee groups?  If not, where and why should it differ?
• What level of performance should be considered?  Individual? Work team/group/department? Business unit?  Organization wide?
• Should this be the same for all employee groups?  If not, where and why should it differ?

Communication

A BIG topic that ultimately deserves its own conversation, but the philosophy conversation can be a good place to at least set a few ground rules and overarching objectives.  

• How much compensation information, of what type and in what manner should compensation information be shared with employees? 
• What messages do you think your employees receive from your compensation program and practices?  Are these the messages you want to be sending?  If not, what?

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

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

Creative Commons Image: "A New Perspective on Chess" by sottenbr

Comments

[E. James (Jim) Brennan]

Retention or Turnover Control were always factors on my list, as well as Employee Confidence in Management Process Integrity or Internal Equity, to use longer terms for "Credibility". If the best strategies aren't believed, related tactics tend to fail.

Government Compliance, Cost Control/Effectiveness, Administrative Ease and Concern for Employees were my final factors.

I used to survey senior executive perceptions of what they thought each organizational policy objective was, its priority level, and what they personally saw as the current reality in each area.

The confidential answers were generally surprisingly consistent. I thus found that the group-sharing of high-level confidential executive interviews Compensation Audit findings always brought universal relief. Every top exec though THEY were the only ones confused about specific off-center policy practices. No one wanted to admit ignorance, so the outsider could safely tell them they all felt the same way.

Sometimes it takes a mercenary to give credence....

[Ann Bares]

Thanks, Jim, for your perspective and for highlighting these additional important topical areas.

True that last line, for sure. I note something similar to my clients, who are frustrated by the fact that they have been asking the same questions and highlighting the same issues for years - but all are suddenly given credence and attention when they come from the mouth of a paid consultant.