OVERCOMING MARKET PRESSURES: COMPENSATION DESIGNCompensation Philosophy Examples According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For

OVERCOMING MARKET PRESSURES: COMPENSATION DESIGN THAT BALANCES COMPANY GOALS & INDUSTRY SHIFTS

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Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts

HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and

allocation of merit, bonus and equity awards to drive manager and employee engagement.

Oftentimes when managers discuss pay with their employees, they encounter questions for which they may

not have an answer. Employees want to know that they are receiving fair pay for their contributions, so they

may wonder how their pay is linked to performance, how it compares to other salaries within the company, and

likewise, how it compares to similar positions outside the organization.

Answering these questions is important to retaining talent, which is why all organizations should be equipped

with a compensation design that balances company goals and industry shifts. Establishing a clear and

standardized compensation philosophy eliminates the guesswork when employees seek to find out why they

are being paid the way they are, and it also enforces transparency across the organization. Moreover, a well-

developed compensation strategy helps to support the execution of the business strategy while also maintaining

competitiveness.

With that said, designing a compensation strategy that balances internal and external factors requires the

consideration of many complex variables. In the coming pages, we’ll present ways for navigating these

challenges successfully, including:

How to link business strategy and compensation strategy

Key compensation principles to consider

Ways to develop a compensation philosophy and goals

Example methodology for designing a compensation strategy

How to maintain a competitive pay philosophy

Let’s begin by taking a look at how companies can use their business strategy as a starting point for developing

their pay philosophy.

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Linking Business Strategy & Compensation Strategy

For a company’s compensation strategy to be effective, it must be linked to the overall business strategy.

Because compensation accounts for 30-60% of business costs, it is essential for organizations to identify the

drivers behind pay. For this reason, the foundational step of creating any solid compensation strategy is linking it

to the business strategy.

The business strategy informs the direction in which the organization is going relative to its overall environment.

It comprises both its short and long-range goals and objectives, and can encompass its SMART goals, pay for

performance objectives, or any other goal setting methodology the company utilizes.

Oftentimes, the jump from business strategy to compensation strategy is made without considering a crucial

middle part: the human resources strategy. This entails the organization’s overall plan for attraction, retention, and

motivation of employees, and should therefore not be overlooked when developing a compensation strategy.

The compensation strategy should include the principles that guide the design, implementation, and

administration of the overall compensation program (including pay and benefits). To choose the right

compensation approach, be sure to select a rewards system that supports and reinforces the strategy, goals, and

objectives of the business. The strategy must also respond to external pressures, using pay as an opportunity to

create a competitive advantage in the market. Additionally, because a business’s strategy is only as good as the

employees’ ability to execute it, the pay strategy should ultimately recognize and reward the performance that

drives results.

In the coming section, we’ll take a closer look at the key compensation principles that can be used to formulate

an effective pay strategy.

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Key Compensation Principles

For the majority of organizations, the core

principles of compensation involve striking a

balance between paying in a way that is externally

competitive and internally fair. Yet, there are

many different interpretations of what is fair. For

this reason, it is critical to achieve clarity and

agreement among key stakeholders on how the

company should be paying its people. This will

ultimately inform your rewards philosophy.

A company’s rewards philosophy is driven by a

few key factors: its employee groups, including

generations, locations, and ethnicities; its business

segments and sectors; its business growth

aspirations; and, its business life cycle. While each

of these elements drives the rewards philosophy

in unique ways, one of the primary factors to look

at when designing a compensation plan is the

business’s life cycle.

A business may fall into one of the following

stages: launch, growth, shakeout, maturity, and

decline. Assessing which phase the business

serves as a critical building block of developing

a pay strategy. According to an HRsoft poll, 48%

of businesses are now in the growth phase, while

the maturity stage is a close second, with 42% of

companies in that category. A remaining 10% are in

the shakeout phase.

Because there are unique pressures and demands at each stage, compensation professionals must know where

their companies fall in order to develop pay plans that support the needs of the business at that moment in time.

The plan should answer the question: How do we tie in compensation to help the company through this particular

stage? While this is an ongoing question to which there is no simple, definitive answer, revisiting it regularly will

help to ensure pay decisions are always supporting the needs of the company. Forming your compensation

philosophy and goals can assist in this process, so we will discuss this step in the following segment.

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Compensation Philosophy & Goals

A compensation philosophy aims to ensure pay is

market-competitive and aligned to the business

strategy. To support these two factors, there are six

components, or goals, of compensation philosophy:

Attract top talent from the market

Retain difference-makers

Inspire stellar performance

Compensation professionals must meet with senior executives to collect their insights on these key topics. It

is essential to “speak their language” when discussing pay and present the information that is most critical to

executives’ top priorities.

When forming compensation decisions, some external questions to consider might include:

Where does the company want to position itself relative to the broad and specific industry?

Keep in mind that compensation data may need to be reviewed outside of your specific niche. If you

are a nonprofit, for example, you may also need to factor in data from for-profit organizations, as the

transferrable skills of top talent may be similar despite the differentiating characteristics of organizations.

Who are our top competitors for business? Who are our top competitors for talent?

The answers to these two questions won’t necessarily be the same, so analyzing factors can help you

take a more competitive approach to recruiting and retaining top talent.

Are there geographical differences to consider?

Consider how pay might differ across various locations and types of communities, including major urban

cities versus rural locations.

When basing compensation decisions on internal factors, consider how pay might differ:

Pay competitively in global operations

Support the business strategy

Balance profitability, growth, and expense control

In the same role

In the same level or grade

In the same industry segment

In the same performance category

With an increasing demand for pay transparency, it is essential for companies to have a consistent methodology

for determining compensation. These factors can be used as a starting point and may serve as a framework for

discussions with senior management.

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Compensation Philosophy Examples

According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For those that

do not, reviewing examples may provide inspiration for developing a compensation philosophy that reflects a

company’s own unique business goals and corporate culture. Here is one sample of a compensation philosophy

to review:

COMPANY believes that it is in the best interest of both the organization and our associates to fairly pay our workforce

for the value of the work provided, within its financial ability to do so. It is our intention to use a competitive system

that will determine the current market value of a position based on the skills, knowledge, and behaviors required of a

fully competent job incumbent. The system will be objective and non-discriminatory. It must also be flexible enough

to ensure that the company is able to recruit and retain a highly qualified workforce.

Of course, a pay philosophy must be upheld through action. To translate the above philosophy into an actionable

process, here are the key steps which the company might take in this example:

The compensation system will price positions using local, national, and industry-specific survey data. We

will evaluate external equity, which is the relative marketplace job worth of jobs directly comparable to

jobs within _____.

All jobs will be placed in a hierarchy based on: 1) market rate, and 2) comparison to other jobs within _____

based on skills, knowledge, training required, experience, responsibility, and accountability

COMPANY intends to monitor the marketplace in which it competes for talent and when warranted, at

management’s discretion, increases may be made to the base pay of incumbents whose jobs are covered

by the scope of this policy.

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Methodology

Following a prescribed process can help an

organization achieve a balanced compensation

design successfully. While each company may

need to tweak their methodology slightly to align

with their own specific requirements, this sample

method may be useful in helping you establish a

solid framework:

Phase 1: Internal Assessment

This initial analysis helps compensation

professionals develop a clear understanding of

business goals and ensures all parties, including

key stakeholders, are in agreement about how

compensation decisions will be made. Use the

following steps to perform an internal assessment:

Conduct management interviews

Review roles and responsibilities

Analyze current compensation practices

Analyze the performance management

program

Identify the competitive marketplace

Develop a communications strategy/

transparency

Compile a feedback report

Phase 2: External Assessment

As its name suggests, this phase requires

organizations to analyze external factors through

the following steps:

Select external benchmark jobs

Conduct competitive analysis

Determine the compensation structure

Compare employees’ compensation levels

Phase 3: Design of Incentive Plans (Short & Long Term)

In order for this phase to be executed properly,

companies should have a system for tracking

performance, as well as the effectiveness of their

incentive plans. That way, they can verify that the

plans they’ve developed are actually supporting

the business strategy as intended. Here are

suggested steps for Phase 3:

Determine appropriate levels of incentive

awards

Select performance measures

Determine the incentive formula

Present alternatives for consideration

Phase 4: Communication Plans

The final phase involves two steps for developing

plans so the compensation plan can be effectively

communicated to the workforce:

Update the compensation policy manual

Design communications meetings

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Compensation and Performance Management Study

The overarching goal of the compensation strategy

is to make sure an organization has the right

amount of money necessary to motivate the types

of performance needed to achieve the business

strategy. To that end, compensation should also tie

into the overall performance management strategy.

Your practices must therefore be understood by

employees and based on hard, objective data. It is

essential to maintain an approach in which equal

pay is given for equal work. These critical objectives

can be achieved by:

Standardizing pay practices and basing the compensation system on benchmarks

Achieving internal parity

Providing competitive hiring scales

Reformatting or rewriting job descriptions

Creating a meaningful performance management tool

Many companies find rewriting their job descriptions to include more results-oriented and measurable

information is beneficial in their compensation planning activities. Instead of simply including the specific tasks

or duties of the job description, consider including why the duty is performed (or which results it aims to achieve)

and how the performance will be measured.

For example, for the role of marketing director in an assisted living facility, the roles and responsibilities might

look like this:

Facilitate the move-in process to build relationships with new residents, which will be measured by new

resident satisfaction

Ensure respite apartments are ready to show to ensure marketability, which will be measured by

apartment turnover

Develop and maintain a detailed marketing plan to great market share, which will be measured through

competitive market data

In the next section, we’ll review some final best practices for maintaining a competitive pay philosophy and

communication policy.

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Maintaining a Competitive Pay Philosophy

Only 36% of employers have a formal compensation

communications program, according to an HRsoft

poll. However, this is something all organizations

should have, because a compensation plan is

only effective when the workforce understands it.

Developing a formal compensation communications

program provides employees with an understanding

of why pay decisions are made.

To develop a communication plan, compensation professionals should consider what transparency means in

their organizations. This will help them determine how much information will be shared and to whom.

In addition to developing a communications program, employers must also ensure they are continuously

maintaining competitiveness in their pay philosophy. Developing a compensation philosophy is not a “one and

done” activity; it must be revisited as the business strategy evolves to reflect current goals. At a minimum, the

compensation philosophy should be reviewed every two years to:

Confirm linkage with the HR and business strategies

Reevaluate where the company is in the business cycle (growth phase, maturity, etc.)

Assess industry trends

Raise and address any questions or issues before senior management does

Here are some best practices to keep in mind for designing, reviewing, and updating compensation programs:

Understand changes in job roles and responsibilities

Confirm job matching process for internal and external comparisons

Recognize that roughly half of jobs are typically more general industry while the other half is usually

industry-specific

Develop a planned timeline to do in-depth market survey matches with line management using selected

groups each year

Specialized compensation surveys are advantageous for employers because organizations are always changing.

Each year, there are new products or services which demand new skills and abilities. Market surveys do not

require a significant time investment to incorporate the jobs needed, but many organizations have a need

for more customized reporting. As such, using data from a specialized survey can help companies make pay

decisions based on accurate data.

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Getting Started

To determine whether an organization truly needs

to reevaluate its compensation design, here are a

few questions for consideration:

Why do you want to design or redesign the

compensation program?

Why now?

How does this fit within your overall

business strategy?

What is the business strategy?

Where does this fit into the overall human

resources strategy in particular

If you don’t do it now, what are the risks?

What will happen?

Here is an example of how the typical project methodology might look from start to finish:

Internal assessment: review job descriptions and practices

External assessment: conduct and review compensation surveys

Job worth hierarchy: rank order from low to high

Salary ranges: set parameters for pay decisions

Compensation policy: ensure that it is fair and equitable

Pay-for-performance: set and review performance standards

Pay admin manual: review it to ensure consistent practices

Communicate: decide what to say and to whom

Implement the plan

Remember that the compensation plan should be transparent, relevant, and current. To align the plan precisely

with the needs and goals of the organization, compensation professionals must truly be students of their

operation. They must also connect the dots to the mission, values, and operational objectives. This will help to

ensure a comprehensive and effective pay policy.

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Summary

Many considerations for effective compensation

design have been covered within this guide.

Although weighing multiple internal and

external factors to achieve a balanced, effective

compensation plan can be complex, it can be

broken down by following a standard process. While

each company should tailor its approach to fit its

specific demands, here are some key takeaways

that are helpful across all industries and types of

business:

Know your business.

Identify the driving factors behind your company’s decision to redesign its compensation plan.

Understand distinguishing characteristics of your company, including the business strategy, its current

phase in the business cycle, and how your performance management and HR strategies will fit into your

compensation strategy.

Analyze the current state of your compensation program.

Assess where your company is paying compared to the market by performing benchmarking. Determine

to what degree outside factors will influence your pay decisions.

Meet with senior management.

Ensure coherence among key stakeholders in terms of what is fair and which outcomes are expected to

be achieved through the compensation plan.

Develop a compensation philosophy statement.

Make sure that the statement supports the organization’s mission and its overall business strategy.

Communicate the plan.

Make sure managers are prepared to discuss compensation decisions to reinforce the desired behaviors

and business results.

For many organizations, lack of information breeds mistrust among employees. By designing your compensation

strategy in a way that balances company goals and industry shifts, you will have a defensible basis which can be

used to explain why compensation decisions are made. While employees may not always agree with every pay

decision that is made, becoming more transparent with a balanced and standardized approach to compensation

is a powerful way to earn the trust and respect of the workforce.

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About the Contributor

Don McDermott | D. G. McDermott Associates

Don McDermott is a recognized authority in the field of compensation with

over 30 years of related experience as both an internal and external consultant.

He has an MBA from Fairleigh Dickinson University and a B.A. from St. Mary’s

Seminary and University. Don served as a National Officer of the WorldatWork/

American Compensation Association and President of the New York Compensation

Association. WorldatWork/American Compensation Association have granted

Don its highest award, Life Membership, for his contributions to the field of

compensation. Prior to his consulting experience, Don held senior positions

in human resources and compensation and benefits at Bankers Trust Co., NL

Industries, Gulf & Western Industries, and M&T Chemicals, Inc.

Resources

HRsoft is the trusted global leader in compensation management

software whose COMPview solution is proven to control and

simplify the full process and allocation of merit, bonus and equity

awards to drive manager and employee engagement.

Phone: 866.953.8800 | Email: [email protected] | Web: hrsoft.com

Phone: 732-842-8634 | Email: [email protected] | Web: www.dgm.com

mailto:[email protected]

https://www.dgm.com/

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OVERCOMING MARKET PRESSURES: COMPENSATION DESIGNCompensation Philosophy Examples According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For