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.
- 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