Are You Ready to Explain Your Compensation Strategy (Coherently?)

Hands of two men counting, giving and taking dollars (Count money)Transparency is vital when discussing how you will compensate and reward top performers. But research shows that the majority of managers do not understand their own organization’s compensation philosophy. (And it’s pretty darn hard to transparently explain something you don’t understand yourself.) This was not a big problem until recently, because managers generally had access to better compensation information than job seekers, so they could wing it.

Those days will soon be over. Credible salary data was once the exclusive province of employers, who paid dearly for it. Now it is available to job seekers at a very reasonable cost.

“On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.” -Stewart Brand to Steve Wozniak at the first Hackers Conference, circa 1984.

Whatever your opinion of hacker conferences, Julian Assange or Edward Snowden, they illustrate a fact of modern life: information gets out. And salary data is no different.

So as a hiring manager, you now need to be ready to negotiate with equally well-informed job seekers. And while that may be unfamiliar territory, it’s actually good news. Credible, shared salary information helps to move the salary negotiation process out of the realm of hard-ball negotiating tactics and trust-damaging gamesmanship. Instead of haggling back and forth over a starting salary, you can review salary data objectively, and discuss how the candidate’s performance will drive their compensation. Shared information creates a common frame of reference for both parties, resulting in a mature conversation centered on performance expectations and job market realities.

It’s not really that hard.

Most compensation philosophies have the same basic objectives: to attract, retain and motivate your best employees. And of course, your total compensation involves a mixture of base pay, incentive pay, and benefits. But in smaller organizations a compensation philosophy did not suddenly appear to everyone, fully grown and armor-clad, like Athena from Zeus. No, your compensation norms probably evolved piecemeal over time. They are probably more informal than tightly structured. Perhaps you reward job proficiency, or performance against goals, or tenure, or advanced education. But no matter how your strategy evolved, you still need to find a way to talk about it intelligently. (By the way, this article from SHRM is an excellent starting point, Registration may be required.)

Compensation experts recommend making your compensation philosophy explicitly obvious and transparent to everyone, so your plan actively guides your decisions. At a minimum, your plan should help retain your best people, and not waste precious resources on your poorest performers. Compensation expert Kim Keating recommends that your philosophy address “The 4 C’s” – Culture, Competition, Calculation, and Communication.  Here’s how Kim defines The 4 C’s:

  1. Culture: What is the emphasis in your culture for financially-based rewards? How tight is the linkage between pay and performance? How much of pay is base salary vs. incentive compensation? Do you routinely use money as a motivator? Is compensation routinely discussed in day to day conversations (as it might be in a sales-driven culture?) Or is the culture more egalitarian, with greater focus on mission, the intrinsic reward of the work, non-cash rewards, or perhaps work/life balance (these are often called “total rewards”)?
  2. Competition/Market Competitiveness: What are other organizations in your industry and location paying? Where is your competitive advantage in total rewards? What is your strategy to attract great people?  (This may vary by size of company, level of position, type of job, education, etc.)
  3. Calculation/Calibration: Other market factors are also critically important: What is the supply of talent (Abundant or Scarce)? How stable is your organization relative to other places your employees could work? And of course, is your current compensation strategy working? (One indicator is the amount of unwanted turnover that you are experiencing among your top performers.)
  4. Communication: How explicit is the linkage between performance and compensation? How clear is it to every employee within your organization how their behavior drives their compensation? Do you feel confident in explaining your compensation, or is it filled with exceptions, implicit understandings that are hard to explain, and discrepancies?

The ultimate goal is to avoid a compensation strategy that is full of exceptions, especially one that you don’t feel comfortable explaining to your employees. You need to be specific and transparent about the factors that drive compensation. Because, as Kim notes:

Without some clear indication for the rationale behind compensation and promotion decisions, people always fill in the blanks with the worst possible scenario. They’ll call it favoritism, or think it’s because their manager doesn’t like them, or that they’ve been there too long. Clear internal equity helps alleviate this struggle, since the assumptions are typically far worse than the reality of the situation.

Top performers gravitate to employers that reward performance in a transparent way. They want to be rewarded for their higher skill, extra efforts and out-sized results. They will not accept your job offer if they think your organization’s compensation philosophy is full of vague platitudes. On the other hand, poor performers love environments where everyone is left in the dark and treated the same – they don’t want their performance measured and evaluated too closely.

So, no matter what your job ads say, no matter what your executive team says, no matter what nice platitudes you have posted on the walls of your conference room, your compensation philosophy will have a massive impact on the kind of employees you end up with.

One Response to Are You Ready to Explain Your Compensation Strategy (Coherently?)

  1. […] your organization. And odds are they didn’t include it because they want to ensure that your compensation philosophy is market-based – not based on their salary […]

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