Compensation Philosophy Development

Elena Mason, CEO

A compensation philosophy is one of the most powerful statements an organization can have. It dictates the strategy for how salaries are to be administered and governed. Compensation philosophies are intentions leaders make, sometimes as a direct result of an external wage study, but often because of intervening factors like funding restrictions, fierce competition for talents, or cultural influences. They are the basis for rewarding comparable compensation for jobs with comparable responsibilities, knowledge requirements and market demands.

The first step in developing a compensation philosophy is to make peace with the fact that a written intent must be present for an organization's compensation strategy to see success. In every project engagement, PGN HR's consultants use compensation philosophy to guide their actions on data collection, data analysis, financial impact analysis, reporting, and providing actionable recommendations.

We assess our clients' posture in terms of current reality versus organizational objectives. We discuss factors our clients consider compensable and critical, which can include education, experience, complexity, authority, job responsibilities, time in job, and employee performance.

An Example Of A Compensation Philosophy Explored

If an organization says that their compensation philosophy is to match salaries to the top quartile of the market average, this actually means the focus is to compare salaries against data within 2 standard deviations. This ensures that salaries are competitively similar with the market average 95% of the time. Not 100% of the time. Meaning the comparison is not a one-to-one ratio. Salaries are not compared with the market average at 100%, we take the 95% value of the market average.

Compensation philosophies have strong influence over the end-results of any engagements, particularly in stages where financial impacts and post-roll-out salary equity issues are being discussed.

Policies Affecting Compensation

On another note, policies too affect the end-results of market studies. One particular policy that always creeps up towards the end of the study is the “Policy on Initial Hiring”. Initial hiring policies always confuse clients and consultants alike. Very often, the study analysis will adjust salaries based on the employees’ incumbency in the job. Jobs are then assigned to newly updated salary structures using factors that include “years in position”. But then problems arise when few months down the road, clients try to hire someone and count “years of experience” as creditable item for assigning new hires into the structure at a 1:1 ratio.

This causes compression issues and internal equity problems because now, the new hire will be placed at the same or a much higher rates in the range than the existing incumbent, because clients invariably used years of experience with 1:1 ratio credit. Meaning, a one-year experience outside equates to one-year experience within.

All these issues can actually be addressed in the beginning by proper communication, understanding, and technical guidance for updating or amending policies and practices and of course, developing a compensation philosophy.

- Elena C. Mason, SPHR, CCP, Prudential Global Network

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