Yes, it’s worth the time and focus on your compensation philosophy, because it is the basis for everything you do in compensation. You need to get it to paper so execs, managers, and employees understand, says Rizzuti.
Rizzuti, who is a principal and senior consultant with Compensation Resources, Inc, in Upper Saddle River, New Jersey, offered her tips at a recent webinar sponsored by BLR and HR Hero.
The compensation philosophy will typically cover the following, says Rizzuti:
Company Values and Mission
Begin with a brief statement of the organization’s mission and values.
Company’s Position Relative to Market
This is the heart of the philosophy—how you position yourself relative to the market.
- Name a specific marketplace(s) in which you compete for talent. Many companies are now operating across industries. For example, one healthcare client has now gone into education. Some positions may easily allow for cross-recruiting out of your industry, for example, CFO and customer service.
- Identify specific peers or simply say we have selected peer companies with which to compare ourselves.
- State the percentile for benchmarking. What is our desired level of competitiveness? Many companies go for 50%, says Rizzuti, but now some are looking to pay higher. One client goes more like 110%—they want to be the top payer.
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Position on Pay for Performance
Defines the proportion of fixed and variable pay. This generally differs depending on the level of the position. Higher levels and sales typically have a higher percentage of variable pay.
If establishing a significant pay-for-performance approach, be sure to ask, Can we appropriately measure performance in order to tie achievements to rewards?
Components of Total Rewards Package
Identify the various elements of your total rewards package. Include eligibility and participation guidelines.
Additional Components
You may also include:
- Commitment to professional development
- Commitment to nondiscrimination and consistent application of policies
- Disclaimer—All subject to availability of financial resources
‘We pay competitively’
Some clients prefer to say, “We pay competitively” rather than state a fixed percentage against the market, says Rizzuti. This gives the employer a little more flexibility.
Applying Philosophy to Pay Programs
Once your philosophy is set, it’s important to assess the current compensation plans, says Rizzuti. Are they in line with philosophy?
- Does compensation generally relate to pay positioning?
- Have we effectively tied pay to performance in the past?
- Do employees understand our plans? (They often don’t.)
- Do they know what is expected of them? (Targets are often too soft.)
- Have we sufficiently trained our managers and staff?
- Are the programs consistently applied?
Performance Management
Pay for performance is not effective without meaningful performance measurement and management. Our clients are refocusing on the importance of performance management, says Rizzuti. They are reexamining their programs and processes to:
- Make the most of compensation dollars by tying pay to performance rating,
- Clearly communicate performance expectations,
- Clarify that it is the manager’s responsibility to develop employees, and not just once a year,
- Engage their best and brightest, and
- Recognize that employees want to know more about how they are performing.
Success Factors
Rizzuti offers the following tips for making performance management work:
- Management publicly supports the process.
- Performance management includes both results and behavioral criteria. (You need a system that deals with that difficult employee who says, “I made numbers, I can behave any way I want.”)
- Place the emphasis on managing performance through coaching and counseling.
- Hold managers accountable for effectively utilizing the process. Make performance management an evaluated factor for managers.
- HR must actively evaluate how consistently the program is applied and be ready to train and coach as needed.
Challenges with Performance Management
Rizzuti says she has seen the following challenges in her work with clients:
- Culture of entitlement. This minimizes the effectiveness of performance management. It’s difficult to change, but possible with time. Your efforts may result in turnover, but often it’s turnover of employees you can afford to lose.
- Economic entitlement. Many employees are now saying, I’ve been patient with no or low raises, I understand that it’s been difficult, but now I expect you to get back on track.
- Inconsistent implementation by managers. This leads to mistrust and disengagement. In many clients, we find certain functional areas where managers are more consistent, and others where they are not, says Rizzuti.
- Too many rating levels. Some clients have up to 8 rating levels; that’s too many. It does not challenge managers to identify truly outstanding performers. Go with five levels at most, says Rizzuti. Many clients are having success with three levels, she adds.
- “Satisfactory.” The word doesn’t communicate well. Rizzuti recommends “Solid Performer” or “Effective Performer” as a better designation.
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Assessing Your Current Program
Finally, says Rizzuti, ask the following questions:
- Do managers believe in the process? If not, what can you do?
- Do the forms capture the criteria you need to evaluate?
- Are managers evaluating employees objectively? What does a scattergram show? All high performers?
- Do employees trust the process?
- Is the process used for development purposes?
- Do managers receive periodic refresher training?
- Are rating levels appropriate? Have you experienced "ratings creep"?
- Does HR periodically audit the program?
In tomorrow’s Advisor, the other half of the puzzle—setting meaningful goals—plus an introduction to a respected problem solver, Employee Compensation in [Your State].
When should a company consider altering its comp philosophy?
That’s a slick answer to a challenging question