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Compensation Principles for Effective Pay Strategies

In Part 2 of our multi-part blog series, we talk about the compensation principles that are foundational to ensuring your pay strategies produce the results required.

Striking a balance with core compensation principles

For the majority of organizations, core compensation principles should strike 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 pay 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.

Supporting the business 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.

Establishing compensation philosophy and goals

A compensation philosophy aims to ensure pay is market-competitive and aligned to the business strategy. Supporting these two factors are six compensation philosophy goals:

  • Attract top talent from the market
  • Retain difference-makers
  • Inspire stellar performance
  • Pay competitively in global operations
  • Support the business strategy
  • Balance profitability, growth, and expense control

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 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?
  • Who are our top competitors for business? Who are our top competitors for talent?
  • Are there geographical differences to consider?

Internal factors impacting pay

Internal factors also impact compensation, so it is important to consider how pay might differ in the same:
  • Role
  • Level or grade
  • Industry segment
  • 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. In our next blog post, we’ll share an example of a compensation philosophy and show how it can translate into an actionable process.

McDermott Associates and HRSoft have published a new compensation design whitepaper