Executive compensation levels can set the tone for the competitiveness of the organization. How a company defines its executive compensation philosophy will determine how much is offered to executives, which will in turn influence the strategic direction of the organization. For example, does your organization strive to hire only people who perform higher than all of their peers? If so, does your pay package line up with that expectation? This question is especially relevant for executive compensation.
Outwardly, most companies will say that we pay “competitively.” This is a recommended practice because it gives a little bit of latitude since the organization is not tied to a specific number or percentile within the marketplace. However, the organization can still create goals behind the scenes that are in alignment with the company’s strategic direction.
Articulating an Executive Compensation Philosophy
“Your executive rewards philosophy can be different from your staff rewards philosophy. It’s going to define what your company’s position is on executive pay.” Mary A. Rizzuti outlined in a recent BLR webinar. The executive compensation philosophy serves as a baseline for:
- Assessing market competitiveness
- Designing specific pay plans
- Examining the success of current plans
Defining the executive compensation philosophy starts with an analysis of the company’s current strategic plan. Looking at the big-picture strategy helps to clarify the needs and the desired focus of the organization. Then you can agree on the company’s competitive position. (For example, do you want to pay the market average? Higher than average?) Use this information to craft an overall executive compensation philosophy that is aligned with the company’s strategy.
“Document your philosophy statements and then consider the implications of those statements. So if you say you’re going to pay for performance – that’s your culture – you want to make sure that you have programs in place to support that culture. And if not, then either you want to develop plans or change the philosophy. But you want to make sure that the philosophy statement, the implication, and the stated mission all line up together.” Rizzuti explained.
The philosophy gives you the foundation to look at things holistically. You should consider the total compensation package, not just the base salary. Examine your philosophy in light of existing and intended executive pay plans; review, refine, and improve as needed.
For more information on crafting an executive compensation philosophy, order the webinar recording of “Executive Compensation Studies: Setting the Right Pay Level for Your Organization.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Mary A. Rizzuti, CCP, PHR is a principal and senior consultant with Compensation Resources, Inc. (CRI) . With over 15 years of compensation experience, Rizzuti serves as project manager for consulting projects. She also leads CRI’s Training Institute, delivering customized compensation and human resources training for senior leadership and human resources professionals.
The philosophy can be different from the philosophy for staff, but it shouldn’t be completely independent of the latter. If you don’t think about, e.g., how the executive compensation appears to and affects staff and their perceptions of their own compensation, you’re asking for morale problems.