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Compensation Principles for Effective Pay Strategies

Part 2 of a 5-part series on how to build a compensation strategy for your company that balances corporate goals and industry shifts, supports business strategy and ensures pay transparency.

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.  But as each stage is fraught with its own unique pressures and demands, 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 the next part of our series, we’ll share an example of a compensation philosophy and show how it can translate into an actionable process.

Does your compensation plan
give you the right balance?