June 2007: Compensation Philosophy - Should You Offer Money or Perks?

While benefits such as casual Fridays and flex time can boost morale and motivate employees, the basic reason people work for you is money. This means you have to provide a big enough paycheck so that valued employees don’t leave, yet not break the organization’s budget. This is not an easy task, and it’s complicated by a fundamental fact: Compensation philosophies cannot be simply adapted from one organization to another.

Compensation philosophy is as unique as organization size, geography and customer base. You need to determine compensation philosophy based on your individual mission, geography and management philosophies. A typical question to consider: Do we compete based on offering top dollars or weight the compensation package with culture and other soft benefits to attract and retain staff?

A Three-Part Approach

Jerry Nelson, president of the consulting company HRN Management Group in Salt Lake City, says that compensation strategy is like a three-legged stool, with three critical components that must be in place:

1. Job analysis. What’s required in the position? What are the duties and functions? Job analysis is usually done in writing as a job description and job specifications.
2. Market analysis. Find out what other organizations pay for similar positions. “We usually look at benchmark positions, positions that are so prevalent that there’s a high level of reliability that the market data are valid,” says Nelson. Examples might be accounting clerks, customer service representatives or administrative assistants. Market analysis also considers organization size and location.
3. Internal equity. Evaluate the jobs themselves to determine their relative worth to the organization.

The goal of attracting and retaining talent is the foundation, or skeleton, of the philosophy, says Mike Dougal, a senior consultant with HRValue Group, a human resources consulting company in Plymouth, MI. “But when we talk about creating a compensation philosophy, we’re talking about defining the organization’s position and what it’s going to do to attract and retain talent,” he says. “It will come down to a discussion of internal equity and external competition, two phrases tossed around a lot in the HR community.”

Getting the right people together at the outset is critical, says Dougal. The CEO, other senior executives, and even members of the board of directors are going to be the people who drive compensation philosophy, just as they’re the people who drive the business philosophy. They need to be onboard from the start.

Communicating Your Philosophy

After creating a clear, well-articulated, formal compensation philosophy aligned with your objectives, the strategy needs to be communicated in a way that allows supervisors to talk to their people about it, as opposed to ignoring it or letting it pass by like other corporate band wagons.

Even if your organization keeps pay ranges confidential, communicating strategy and philosophy is vital. It not only arms managers and supervisors with the information they need to attract, retain and motivate staff, it also sends a clear message about what you value and what you’ll reward.

Back to news >>