For the past couple of blogs, I’ve been talking about various aspects of HR planning and the importance of being proactive vs. reactive around people-related activities. One of the most important activities to plan for is compensation. What have you budgeted for compensation, and how will you allocate it for merit increases and adjustments needed to attract and retain the skills identified in your workforce plan?
Step one is clarifying your pay philosophy. A pay philosophy is a set of guiding principles that identifies compensation priorities, and supports organizational values and goals. It explains why the company makes the decisions it does about employee pay, and creates a framework for consistency across the organization. Although a pay philosophy will differ from company to company, all are aligned in the goal of attracting, retaining and motivating the best talent.
Some factors to consider in creating your pay philosophy are company size, financial position, level of difficulty in finding needed talent, the industry, and market salary data. An example might be that you know you have to pay a starting salary slightly above the market in order to attract the right people. Or, your financial position is such that you have to pay slightly below market, but make up for it with a more generous vacation benefit.
As you define your pay philosophy, be sure to consider total compensation – base salary, incentive pay, and benefits. Examples of incentive pay are bonuses, commissions, and profit sharing. Benefits may include medical, dental, and vision insurance; life insurance; paid vacation; leave policies and 401(k) programs. Some companies choose to match 401(k) contributions up to a certain amount, which is an attractive benefit. Recognition is another factor to consider, especially from the perspective of motivating employees. Recognition can include cash awards, or non-cash awards such as sports event tickets, travel vouchers or other “thank you” gifts.
Once you’ve defined your philosophy, commit it to paper and review it periodically to assess how it’s working and identify any changes needed based on changing company circumstances, the market or the economy in general.
If you need more information or need a sounding board as you create your philosophy, please contact me.