When we work with clients, we ask five questions to get to the heart of what they want to achieve while aligning their compensation philosophy to their vision, mission, and values. This way, we ensure it’s authentic and easy to implement.
A compensation philosophy is one of your most powerful tools to motivate employees and drive company performance [See our post about the different types of compensation philosophies you can choose from].
Did you know that your compensation philosophy is the second half of your people systems hypothesis?
The first half is:
What's my talent strategy?
What seats do I need to fill,
What type of skills do I need in this role?
Then, you need to hypothesize what the compensation will need to be to attract and retain that talent.
Having clarity and intentionality is the difference between a powerful compensation philosophy and a weak one.
In order to design the best philosophy for you and your company, use these questions as a guide:
1. Is your compensation philosophy fair, equitable, and defensible?
Big fat duh. If it’s not, go back to the drawing board. Imagine the details of your compensation philosophy somehow become leaked to the whole company.
Will your team perceive the philosophy to be fair? Is it based on the role and not the individual? Is it possible to implement consistently?
2. Is it consistent with your company values?
Do you value flexibility? You should probably have a time off plan that reflects it.
Do you value an entrepreneurship mentality? Create a compensation plan to incentivize ownership that includes giving equity to your employees or incentivize them to create new products, services, or efficiency.
Is your culture one of “never stop learning” which encourages continuous upskilling? Consider an education reimbursement as compensation to ensure your team is encouraged to sign up for certifications, courses and additional degrees.
3. Do you feel good about it?
You need to feel your compensation philosophy is authentic, fair, and comfortable to administer.
If you feel like Scrooge McDuck guarding your tower of gold or if you think you are being overly generous, reconsider. If you have to fight yourself to process payroll or write bonus checks, you might be even more disappointed when your team doesn’t feel as grateful as you want them to.
As a great place to start, I usually ask CEOs what their fiscal political leanings are. If you lean towards libertarian, paying people as much cash with fewer benefits will make the most sense to you. If you are a socialist, you might lean towards more of a 50/50 split. Your leanings still need to match to a degree the talent you are hoping to attract and retain, but it helps to know where you are starting from.
4. Does it align your talent with your company’s strategic plan?
Is your team going to be incentivized by what you put together? Or are you over-incentivizing “Build” team members and under-incentivizing “Buy” team members? [Here’s a link to our talent strategy article if that makes no sense to you].
Does your compensation philosophy match your pace? Are you hoping to incentivize people to run a marathon with you but your compensation is drafted more as a sprint race? Who is your competition?
Make sure you are taking a look at market data every year so you can confidently speak to why you pay your team how you do in relation to your competitors in the market.
Also, make sure you are paying attention to their benefits as well. Compensation is not just cash. People will learn how to play the game you craft, so make sure it’s a good one!
5. Can you afford it?
Generally, we want to give people more money! We want them to stay and make sure they feel well compensated for the work they do. But, is it affordable?
If so, is it sustainable? Your team may value more reasonable wages with incentives tied to company performance instead of Silicon Valley rates that feel great now, but require layoffs in a few months. Make sure you give yourself a runway if you need it.
Final Things to Think About
Take your time answering these questions because they’re big questions. Empower your department leads to weigh in. They know their team better than anyone!
Also, give yourself some grace. You are building a hypothesis!
Gather data, and adjust appropriately. The most powerful compensation philosophy is giving enough time to measure, and includes feedback from the team. Communicate it, try it out for a year, and adjust it next year to bring your team even more into alignment.
Also, don’t feel that your compensation philosophy is permanent. A powerful compensation philosophy is revisited annually to make sure it’s competitive with other businesses in your industry, is relevant to the needs of your employees, and is still aligned to your strategic goals and culture. Make revisions and updates on a regular basis.
This reflective exercise not only fortifies the philosophy but also ensures its adaptability and relevance over time. By diligently addressing these aspects, you are better poised to motivate your team, enhance performance, and stay competitive.
For more information on compensation philosophies and how they can influence your company culture, reach out here.