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

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Executive Compensation Principles

Determining and structuring long-term compensation plans is a complex, multi-year process for boards that is constantly evolving. Compensation plans have many objectives measured over a multi-year time horizon, including:

  • Ensuring that compensation decisions are highly correlated to long-term performance.
  • Enhancing the alignment of interests between executives and shareholders.
  • Mitigating the risk of unintended outcomes or the creation of inappropriate incentives.
  • Attracting, motivating and retaining top talent.

The focus of the following principles is on “pay for performance” and the integration of risk management functions into the executive compensation philosophy and structure.

While proxy disclosure is limited to the top five executives, boards are expected to ensure these principles are used in determining compensation practices throughout the company. The compensation programs for senior executives set the tone and should reflect a company’s overall compensation philosophy and risk profile.

The board and the compensation committee of every public company are responsible for, and accordingly must be actively involved in, establishing and independently verifying compensation philosophy, setting performance measures and assessing performance.

Executive Compensation

The Canadian Coalition for Good Governance (CCGG) recognizes next 6 principles as the Key of the Executive Compensation. Totally agree with them.


A significant component of executive compensation should be “at risk” and based on performance.


“Performance” should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assume.


Executives should build equity in the company to align their interests with those of shareholders.


A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive.


Compensation structure should be simple and easily understood by management, the board and shareholders.


Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.

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Why do we need an HR Strategy?

Reading the website creative HRM (which I totally recommend) I saw a really interesting presentation about why do we need an HR Strategy and How we can build the effective HR Management function in the organization achieving challenging business goals.


Current Business World

  • Highly competitive environment… each company can copy and paste products
  • High levels of uncertainty … the growth era in the industry gets shorter and products replaced quickly
  • Generation Y is not loyal with the employer … they are loyal just with their values
  • Green business as a priority for the modern western organization
  • Constant cost cutting pressure from shareholders and competitors
  • State protection on the rise … again
  • New competitors from emerging marketing growing each day creating the additional pressure on prices

HR StrategyCurrent HR Industry

  • Global workforce management … aligning and unifying many different cultures in one organization
  • Global talent management and implementation of global relocation policies
  • Increasing performance pressure … while (try to) keeping employees satisfied
  • Global HR processes blocking the local flexibility
  • Permanent fight with increasing costs of employment
  • Shifting jobs globally, building the operational centers around the Globe
  • Changing HR environment

HR Industry: Trends

  • Hiring talents globally to ensure that all positions in the organization are staffed with the best talents
  • Supporting innovations to build the sustainable competitive advantage
  • Building highly diverse teams as each team can have members from different continent and from a completely different cultural background … setting new rules for the team work and gaining the right team spirit
  • Working with the older employees … the company gets older, the employees get older as well … keeping the young spirit inside the organization is the challenge and a trend
  • Pushing responsibility down the chain while keeping global and local policies … the global organization is not agile, the local organization cannot be controlled efficiently … HR has to find the right balance between global policies and the local execution
  • Less permanent employees and more project based employees … the lifetime employment is the word from the history … the organization cannot offer the certainty, the employees do not offer the loyalty… the project based employment will be on a rise


HR Strategy: What is it?

  • HR Strategy connects the business strategy with the effort of Human Resources to build a better and competitive organization and aligns top executives with the HR team
  • Sets clear objectives for HR in the areas of the talent development, succession planning and organizational development to ensure the future of the organization
  • Defines the key principles for the compensation and organizational design strategy as the organization keeps itself thin and quick
  • Brings a clear border between global and local decision making processes allowing to act to HR Manager autonomously
  • Defines key areas which will be used as the competitive advantage on the job market
  • Identifies gaps in the people management area which have to be improved in a defined time frame

HR StrategyHR Strategy: Why do we need it?

  1. Designing the modern HR organization requires the strategy.
  2. A strategic shift in HR Responsibilities requires the strategy, which is aligned with business objectives.
  3. Change of HR Roles and Responsibilities has to be driven by outcomes from the strategy implementation.
  4. Award winning HR function has the innovative HR Strategy.
  5. A fast moving company requires the strategic HR management (difficult to achieve without any strategy).
  6. The HR Strategy does support strategic decisions. The cost efficient organization always makes decision supported by strategies.

HR Strategy: Design and Implementation

  1. Assess the readiness for change. Assess HR team and the entire organization. Use HR SWOT Analysis. Develop the HR Strategy for the next few years.
  2. Develop the basic HR framework, which will support the change to being the strategic partner.
  3. Clearly define the role of the HR Leader in the organization. Be the architect.
  4. Get the approval.
  5. Define the changed role of the line management in the people management.
  6. Clearly define owners of the HR Strategy. Define who will execute the strategy, define the strategic split of roles.
  7. Clarify roles in Human Resources. Define specialist and generalist roles.
  8. Design the new HR Organizational Structure.
  9. Fill the structure with upgraded talents.
  10. Let talents define sub-strategies and upgrade the HR Strategy to the final one.
  11. Do the strategic HR.

Borja Burguillos

Compensation’s Role in Human Resource Strategy

Reading the book “Solving the Compensation Puzzle” I realized that even being obvious I had never wrote about the important of Compensation’s Role in Human Resource Strategy so I decides to put this post based on the book and my views.

Compensation is one of many human resource (HR) tools that organizations use to manage their employees. For an organization to receive its money’s worth and motivate and retain skilled employees, it needs to ensure that its compensation system is not an island by itself. Not only is it important for an organization to link compensation to its overall goals and strategies, it is important that its compensation system aligns with its HR strategy.

Too many organizations plan and administer their pay systems by default; or worse, fall back on “the squeaky wheel gets the grease” practices. More than any other area in HR, ignoring pay and performance systems can be devastating. It is a very expensive and laborious process to hire new employees, buy back trust of current employees and renew the organization’s energy and motivation level. By ignoring this issue, it does not go away or get better with time. It will take extra money and valuable resources to fix the system.
Smart, successful organizations do regular planning and evaluating of their compensation and performance appraisal systems. Because compensation is visible and important to employees, it is critical to consistently communicate a clear message regarding how pay decisions are made. In short, a solid pay-for-performance strategy requires that employee pay matches the organization’s message.

Engaging Key Stakeholders to Support the Compensation Strategy

There are three levels of compensation strategy that exist within an HR department:

  • The first level is a strategy that is only understood and supported by the HR department.
  • The second is a strategy that is supported by the HR department and translated into practical solutions, policies and decisions Compensation’s Role in Human Resource Strategy that guide compensation decisions.
  • The third level, which should be an organization’s ultimate goal, is the most difficult to achieve. It is a compensation strategy that supports a pay-for-performance system that transforms and permeates all levels of the organization.

Key Stakeholders of a Pay System_HR StrategyImportant Considerations in Designing a Compensation Strategy

Does the compensation system match the organization’s overall objectives? In other words, how does the compensation strategy complement other HR initiatives? For example, if quality, experience and a sophisticated skill set are an organization’s strategic advantages, then it will not be successful hiring employees significantly below the market rate for that position. To answer this question, it is important to review the organization’s strategic plan (at least annually) and discuss whether the current HR and compensation systems are supporting these initiatives.

market position_HR StrategyWhere does the organization want to be in terms of market competitiveness? In this competitive job market, it is important to be aware of the organization’s competing firms. An organization can lead, meet or lag the market.

pay policies_HR StrategyWhat are the strengths and weaknesses of the organization’s current compensation system? An important component of market competitiveness is to find answers to the following questions:

  • Is the organization able to attract the appropriate skill sets and types ofemployees when needed?
  • Where is the organization hiring its best employees?
  • How long do most employees stay at the organization?
  • Where do employees go when they leave the organization?
  • What are the organization’s promotion policies?
  • Are employees frequently asked to take on new tasks without being rewarded for their efforts?
  • Do employees value the company’s benefit, incentive, work environment?
  • What of these items should be changed or updated?
  • What is the employee morale? This information can be gathered from managers, exit interviews, employee surveys and other communication tools. Employee survey feedback, in particular, provides valuable information for moving forward.
  • What mix of base pay, incentive pay, work environment and benefit levels make the most sense for the organization when considering the competition, types of jobs, niche and labor market available?

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What is HR Strategy?

Below you can see a infographic prepared by Maria Lopez & myself about how we understand should be the best way to implement a HR Strategy succesfully in order to get the goals proposed by the Business Strategy.

HR Strategy

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Flexible Benefits System: increasing the Total Compensation

The Flexible Benefits System (FBS) started in the US during the 1980s, is having a resurgence of popularity in many parts of the globe. When combined with compensation, the flexible benefits are more commonly known as “total rewards.” But there are many countries where flex alone is critical to employer strategies for workforce attraction and retention, as well as cost control.

Early, a Flexible Benefits System represented the first endeavor many HR leaders experienced with the concept of marketing their benefit plans. It was an effort to bring disparate benefits together in a unique package. Unlike a traditional plan in which “one size fits all employees,” FBS was seen as a way to appeal to unique needs within the employee population. Employees, hopefully, would find value in the packaging of the total benefit offering, gain better understanding of the cost and begin to make meaningful decisions about how much they wanted to spend. It was a significant shift away from the paternal role in which employers made all decisions.

The end result is a process whereby employees are more actively engaged in making decisions, and they begin to appreciate the financial value of the total package.

What drove employers to consider a Flexible Benefits System? We see striking parallels between the early FBS adopters and what today’s HR community faces. Maintaining the status quo is extremely difficult in a world where attraction and retention are constantly evolving. Key considerations in early flex programs and current programs are very similar:

These are some typical benefits with tax advantages if employee selects them across a Flexible Benefits System (it can vary by country).

  • Retirement Plan
  • Health Insurance
  • Life Insurance
  • House renting
  • Car renting
  • Meal Vouchers
  • School Vouchers
  • Training

This is a important advantage, because permit the employees enjoy the benefits and reduce his tax to pay (the two things at once)

The Designing a program is often the relatively easy part of the process, the success of a FBS often lies in how well it is communicated and implemented.

A well-designed program integrates four perspectives to support the overall need for a successful change management implementation.

Employer perspective. Analysis of workforce characteristics, variances across operating companies/divisions and emerging trends.

Employee perspective. Research about employee preferences by demographic group, business, and critical areas of hiring and retention. Identification of the most critical rewards that will enhance perceived value and impact on both recruitment and retention.

External perspective. Research about relevant competitor practices and expected direction. Understanding of regulatory and administration requirements.

Cost perspective. Assessment of costs related to all current and prospective programs and the potential for adverse selection.

One other important lesson learned from early the compensation flexible plans are the risk of offering too much choice. Not all employees value it. It can be overwhelming. Some employees will not trust it and therefore will not trust their employer. What are the risks?

Paralysis. People who have too much choice or don’t feel capable of making the “best” choice will avoid making a decision or they will assume they didn’t make the best decision.

Poor choice. People can make bad choices that don’t seem at all rational to an independent viewer. But sometimes employees make the easiest choice or one that is familiar and comfortable rather than one that is more difficult to make.

Regret. Even when someone makes a decision, they might have regret or buyer’s remorse about the choices that could have been made. The result of being overwhelmed with possibilities is that they are less satisfied because they doubt that they made the best decision.

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