Compensation Administration

Build a Philosophical Foundation for Your Compensation Program

The most important part of a building is its foundation. Anyone who has walked safely out of a building after an earthquake can attest to that statement; when the ground shakes, the foundation on which the building rests can be the difference between success and failure.

While passersby and occupants may admire the finely crafted details of the building’s façade, the foundation remains out of view. Its importance is not in appearance, but in its ability to support everything constructed later.

Does your compensation program have a solid foundation? It does if you took the time and made the effort to develop a compensation philosophy.

Compensation Philosophy as a Tool

A company’s compensation philosophy is a narrative of the guidelines and objectives that shape their compensation. It’s a tool the company uses to compare the way they pay their employees relative to their competition, and a reference point on which the entire compensation program—from policy to practice—is based.

To find out how and why a company might develop a compensation philosophy, we spoke with Susan Malanowski, a Principal at the Wilson Group. She is a compensation and HR professional of more than 25 years, advising boards of directors and others on smart compensation practices.

With so much happening for HR and compensation teams, we asked if it’s worth investing the time to develop a compensation philosophy or, as some may fear, if it’s a pointless exercise. “The compensation philosophy in an important foundation to any company’s pay program,” Malanowski asserts. But only if you’re prepared to do it right. If the philosophy is generic and incomplete, and fails to integrate company values, it won’t be the useful tool it could be, she says.

Done well, a compensation philosophy helps a company evaluate and make changes to their compensation programs. “When shared with managers and employees, it answers the “why” about compensation programs.  Managers may also feel more ownership of the pay decisions they make when communicating to employees because they understand the programs at a “concept level.”

Is it too Late to Create a Philosophy?

Even if your company is long-established, it isn’t too late to develop a compensation philosophy that will be useful going forward, Malanowski says. “Companies can benefit at any time in their business cycle. We find that there is most interest in developing a philosophy at the time a company is developing or revisiting one of the pay programs, such as base compensation program (salary grades and ranges, for example) and an incentive program.”

How common are compensation philosophies? Malanowski points to a survey from WorldatWork. “In terms of prevalence, according to WorldatWork’s Compensation Programs and Practices Survey 2016, only 7% of respondents don’t have a compensation philosophy—62% have written philosophies and 31% unwritten.” She notes, though, that an unwritten philosophy isn’t very useful. “It defeats one of the benefits of having one – communicating with managers and employees.”

Large and Small Companies Can Benefit

Creating a compensation philosophy isn’t of benefit only to large companies, Malanowski continues. “I have a client with 40 employees who is developing a philosophy,” she says. “They are active in the market, hiring and growing.  They have a culture that they want to integrate in the description of their compensation programs to provide to their employees. They are also developing a salary structure (grades and ranges).  Although they are small, these are good reasons to create a compensation philosophy.”

Large and public companies benefit for some of the same reasons. But their compensation philosophies are used in other, very specific ways, too. “Because there are differences in how executives are paid,” Malanowski explains, “there may be a [compensation] philosophy specific to executives.  When looking at public company proxies, the CD&A section includes the company’s executive compensation philosophy.

“These are some of the most prevalent and developed philosophies created.  It is important to companies because they are communicating the executive compensation philosophy to their shareholders.”

For many organizations, compensation is more than payroll. Some of them decide to put their cultural stamp on their overall pay program by developing a similar tool: the total rewards philosophy. “Compensation is part of a broader picture of total rewards.  Total rewards includes benefits, recognition and related programs provided to employees,” says Malanowski.

“Including these additional elements in the philosophy can further strengthen how the various programs work together to provide employees with rewards and recognition.”

The Wilson Group suggests including some critical components in your compensation or total rewards philosophy. Among them:

  • A statement of context. This would describe such factors as organizational challenges on the horizon, changes in strategy, or events that have or will impact the company going forward.
  • A statement describing how the compensation program supports the overall mission, values and success of the company.
  • A description of the key program elements, including their purpose, which employees are eligible for them, and how accessible and visible the information should be to employees.
  • Statements about the importance of the compensation or total rewards programs to talent retention and acquisition, as well as staff training and development.

Malanowski and the Wilson Group point to some examples of total rewards and compensation philosophies, each of which takes its own unique approach. On their website, they cite written philosophies from Case Western Reserve University, CitiGroup, and Stanford University.

If your compensation strategy doesn’t seem to be holding up the building, as it were, take a look below the surface. You may find that the foundation needs some shoring up, and developing a compensation philosophy could do the job.