Compensation philosophy

1. What is a compensation philosophy?

  • Articulates what the company believes about how its employees should be treated financially
  • Provides guiding principles for designing cohesive compensation programs
  • Lays out what is important to the company
  • Communicates a consistent and clear message
  • Should be backed up by the company’s actions

Your stated philosophy should reflect the company’s intentions and set expectations for employees. Example statements:

  • Efforts will be recognized, but results will be rewarded.
  • Employees with the greatest level of sustained performance receive the greatest rewards in pay.
  • Solid performers will be targeted at 50th percentile. Top performers will be targeted at 75th percentile.
  • By linking pay opportunities to clearly outlined individual performance objectives, we offer every employee an equal chance to succeed.
  • All employees should share in the financial success of the company.
  • Our compensation programs are globally focused, locally competitive.
  • We want all employees to think like owners, which is why we award stock options to every employee.

compensation philosophy2. Why do you need an explicit compensation philosophy?

  • Managers might be making compensation decisions that are not in the best interests of the company as a whole
  • There may be an implicit philosophy that isn’t consistent across the company
    • Look at employee communications over the years
    • Informally survey top managers of the company
    • What do the current compensation programs look like and what do they “say” about the company’s beliefs?
    • Does the corporate culture offer any clues?

3. How do we develop a compensation philosophy?

  • Interview senior management and Board of Directors
    • Business objectives, current and future
    • Desired employee behaviors to accomplish those objectives
    • Competitive environment and desired positioning
    • Recruiting or retention issues
    • Pay elements and desired mix
  • Outline current rewards programs
    • Where are we now?
    • Where do we want to be?
    • How do we get there?

4. When might your compensation philosophy change?

  • Leaving start-up phase
  • Major change in your business model
  • Business and headcount growth that outpaces expectations
  • Following a merger or major acquisition

5. What is a successful compensation system?

  • Supports the company’s compensation philosophy
  • Enables the company to compete for the talent it needs to be successful
  • Provides sustainable compensation programs
  • Allows the company to meet its financial goals
  • Flexible enough to accommodate changes in the company or marketplace
  • Motivates and rewards complementary objectives over the short and long term

Borja Burguillos

Author: Borja Burguillos

Global People Strategy

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