Many companies are now facing the upcoming year wondering if they should increase employees’ compensation. Before you make a decision on compensation, let’s use this time to create and communicate a compensation philosophy.
The compensation philosophy should support the firm’s strategic plan and business goals. It should identify the philosophy components:
- How the budget for compensation increases is determined
- What is rewarded: merit increases, incentives and/or promotions
- What measurements or indicators signal a compensation increase
- Define and calculate all components of compensation: total compensation includes the employer contribution to benefits
- How the pay programs and strategies support the business strategies
How can an organization start the process in defining compensation philosophy? Start with your business mission and goals. What are you looking to accomplish overall and particularly in 2011? To reach your goals, what tasks and duties need to be performed and by whom?
Determine what kind of work should be expected for:
The base wage or salary
- This should meet at least the satisfactory level of performance and include levels that exceed expectations.
- Outline the amounts of salary or wages a person could earn in this position.
- Levels of base wage or salary should reflect years of experience, knowledge, volume of work, special demands and level of decision-making, for example.
Under what circumstances would you consider a merit increase, arising from performance? Superior performance of one’s job duties or taking over additional work duties, for example.
These circumstances are usually project/task specific where the performance can easily be tied to business results. For example, completing financial plans earlier than planned and scheduling clients for the presentation meeting or finding a method that produces the same results in less time or money.
These circumstances involve assessing the employee’s motivation and ability to move to a different position.
Benchmark positions with market compensation data. Benchmarking requires the use of outside compensation data on positions similar to the one(s) you have; comparing benefits offered and considering regional- and firm-size differences.
If you can’t offer as much pay or benefits, consider alternative rewards. Survey employees to find out what rewards they value.
Finally, communicate of the compensation strategy. You should share (within reason) how you arrived at the components of your compensation philosophy. That gives employees a more comprehensive overview of where the business is heading and what opportunities might be available.
Many firms share with employees the research that went into defining the different pay levels. This can clear any employee misperceptions on what they should be paid, and could show employees what they need to do to reach incentives or move to the next level. It encourages conversation.
And consider your competition when retaining or acquiring talent. While you are evaluating your budget for compensation increases, consider:
- Not every employee automatically gets an increase in compensation. Make it fair based on performance results—the employee’s and the business’s.
- Acquiring talent can be more challenging and competitive in some regions. Know how to shape your total compensation package to attract the people for your team.
- The firm may have to pay for future results now. Compensation for existing and future employees may have to reward the right work now so that the expected results occur in the future.
Mary Dunlap, CFP®
Mary Dunlap Consulting