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April 16, 2010
Compensation 101: Purpose of Compensation Philosophy

When a company determines its compensation philosophy, it should consider its positioning within the marketplace. What other companies are peers in terms of places of employment? What companies do your employees come from before they are hired or where do they go to when they leave your organization? These types of questions will help you see where compensation differences are prevalent between marketplace peers and help you clearly define your compensation philosophy and goals.

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In a BLR webinar titled "Compensation 101: Essential Secrets and Strategies for HR Professionals," Paul R. Dorf outlined the purpose of a compensation philosophy.

Dorf advised that most employees do not understand the nuances of the company's compensation program. This confusion is a major de-motivator to employees. Having a clear philosophy and communicating it well is key.

A compensation philosophy:

  • Spells out the company's intentions
  • Identifies the market for pay comparison
  • Considers the strategic plan and mission and vision, which drives business decisions
  • Focuses on HR and compensation, which drives compensation decisions
  • Identifies the total compensation package elements

When you clearly define your compensation philosophy, it establishes your position on total pay. In turn, this serves as a strong communication tool and can be used to align pay with company goals. Your compensation philosophy will be shaped by the following variables:

  • Company financial condition, goals
  • Culture and management style
  • Intended position in marketplace
  • Labor market and competition for talent
  • Characteristics and needs of the workforce
  • Economic, legal, and regulatory conditions

These variables need to be considered when you work on establishing your compensation philosophy. Once established, compensation philosophy has a lot of implications. You should consider:

  • Will it impact recruitment and retention?
  • Does it identify career opportunities?
  • What are the costs involved?
  • Do current pay plans need to be changed?
  • Will employees embrace it positively?
  • Does it provide unintended commitments?
  • Does it FARM (Focus, Attract, Retain, and Motivate)?

Once the compensation philosophy is established, it is important to communicate the philosophy well. Success is dependent on timely and thorough communication. This builds enthusiasm for the pay programs, and establishes the company's commitment to them. Just use caution: don’t include anything the company is not willing to stand by!

Paul Dorf is the Managing Director of Compensation Resources, Inc. (CRI). CRI (www.compensationresources.com) specializes in providing comprehensive Compensation and Human Resource consulting services. Dorf is responsible for directing consulting services in all areas of executive compensation, short and long term incentives, sales compensation, performance management programs, and salary admin programs.

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