Is Your Company Following its Compensation Philosophy?

Does your company do a good job of following and communicating its philosophy around compensation? A WorldatWork study sponsored by Aon Hewitt found that while 92 percent of companies surveyed have a formal compensation philosophy, only 63 percent have it in writing. More importantly, 53 percent of the companies surveyed indicate that most employees don’t understand their company’s compensation philosophy.

Considering that fairness in pay—or lack of—is an important issue, being able to articulate your company’s overall stance on compensation strategy is a critical aspect to hiring and retaining the best employees.

WorldatWork defines a compensation philosophy as “a statement explaining an organization’s beliefs about how people should be paid, as well as how that pay should support the business strategy and fit within organization culture.” With an articulated philosophy as a starting point, a company can map out a strategy for compensating workers—below, at, or above market rate—and the components of compensation, such as salary, bonus, and stock.

Here are the three elements we believe every company should evaluate before crafting a coherent compensation philosophy or pay strategy:

• Growth goals. Lofty goals for company growth may require more aggressive tactics for acquiring and maintaining talent. Special perks like Friday yoga or in-chair massage, retention bonuses, and large cash incentives for employee referrals may be critical components.
• Market conditions. By regularly conducting fair market salary benchmarking, you can identify if there are any major gaps in your compensation plan.
• Market comparison. Where does your organization want to stand relative to the market? Having a clear stance will help with decisions down the road, and gives employees clarity.

Measuring Against Goals

Once your compensation philosophy is articulated, how do you know if it’s meeting expectations? According to the WorldatWork survey, management primarily uses employee turnover/retention (61 percent of respondents) and employee satisfaction survey metrics (47 percent) to determine the effectiveness of salary programs.

While important, retention and satisfaction numbers don’t tell the whole story. They may not be helpful in identifying the root cause of any problems—if employees in certain geographies or under certain managers are especially prone to turnover, for example. Ideally, survey data can be tracked over time to help you spot trends and identify problems: The more granularly you can drill down into the responses, the more likely it is you can gain actionable insights.

For many organizations, evaluating the effectiveness of your compensation philosophy will be a global undertaking. Remember that the simpler your approach to pay and benefits calculations, the easier they are to scale. Looking at historical data and reports on your organization’s current compensation measurements is critical. If it looks like your compensation philosophy is not working out as intended—or if there are some unfortunate consequences of earlier decisions—the ability to model possible remedies is ideal.

And finally, once you have a clear path forward, be sure to close the loop with communication to employees about your compensation philosophy. You may not call out every detail, but transparency will help employees better understand the intentions of your organization when it comes to pay.

Workday Compensation empowers employees to quickly see their total compensation on any device at any time. Compensation administrators using Workday can easily report and act on their organization’s compensation plans in real-time, and use market data to make informed decisions about compensation.