The Importance of a Written Pay Philosophy

I had the opportunity earlier this week to attend a presentation by Rich Sperling and Dana Martin of Hay Group on Best Practices in Reward Design.  The presentation highlighted findings from recent research on reward design and management that Hay conducted in partnership with WorldatWork. 

One of the research findings that I though worth noting here was on compensation philosophy.  (As covered in earlier posts here and here, a compensation philosophy represents the consensus of organizational leaders regarding what should be accomplished - and how - with the dollars spent on employee compensation.)

Research participants were asked to respond with either "true" or "false" to the statement:  "My company has a compensation philosophy."  91% responded with "true"; that their companies do indeed have a compensation philosophy.  When asked in another question whether or not the compensation philosophy was "written", only 62% said "yes".

Surprised?  I'm not.  In fact, I run into this all the time.  The management of nearly every company I talk with assures me that they do, in fact, have a compensation philosophy - but very few of them have it documented.  What does this mean?  As far as I'm concerned, it means they don't really have a compensation philosophy - or at least not one that leadership has come to agreement on.  This is a lesson that I have learned the hard way.  Let me share an example.

A medical services company has hired me to review their compensation program.  Employee turnover is at an all time high, employee satisfaction is low, and management believes that compensation is a key contributing factor to these issues (employee opinion survey results would appear to confirm this).  Before I can review their compensation program and tell them whether or not it is accomplishing what it should, I first need to know what it is they want the program to accomplish.  How competitive should pay be?  What is their compensation philosophy? 

Management spurns my offer to sit down and discuss compensation philosophy with them, assuring me that - although it is not documented anywhere - they are "very clear" on their philosophy and what it means.  In fact, there are a couple of staff meetings coming up where top management (the Chairman of the Board for one meeting, the President for the other meeting) is going to be speaking with employees about compensation philosophy and announcing the kick-off of this compensation review project.  Perhaps I could attend, and then I could learn first hand what their compensation philosophy is?  I agree to do this.

Well, I attended both sessions and (as some of you have already guessed), the compensation philosophy explained by the Chairman was completely different (and even at odds with) the one presented by the President.  Bottom line, not only did we have to sit down as a group and discuss (and come to consensus on) the company's philosophy, but now we also had damage control to do.

I could probably share a dozen other versions of this example, just off the top of my head.

My point, of course, is that documenting the compensation philosophy is very important, if for no other reason than it forces discussion and agreement on what that philosophy really entails.  The Hay research confirms this, as it looks more closely at organizations that write down their pay philosophies versus those that don't.  A few examples of their findings here:

• Hay, as you may know, conducts the annual "America's Most Admired Companies" research that is published in Fortune magazine.  When they looked at the prevalence of written compensation philosophies among the "Most Admired" versus all other respondents, they found that:
  • 76% of "Most Admired" companies have a written pay philosophy
  • 61% of all other respondents have a written pay philosophy
• Hay also separated the responding companies into quartiles by their financial performance, using TSR (Total Shareholder Return) as an indicator.  When they looked at the prevalence of written compensation philosophies among the top versus bottom performing companies, they found that:
  • 71% of the companies in the top quartile for financial performance have a written pay philosophy
  • 53% of the companies in the bottom quartile for financial performance have a written pay philosophy
• And not surprisingly, when Hay asked respondents how well they believe their employees understand the company's compensation philosophy, they found that:
  • 44% of the companies with a written compensation philosophy responded that most employees understand it
  • 21% of the companies with a compensation philosophy that is not written responded that most employees understand it

I think I've made my point.

Comments

[Frank Giancola]

Perhaps, the better run companies understand that documenting policies and procedures, generally, is a good idea. Sometimes, the practice of documentation is held in low regard, because it spacks of the dreaded "bureaucracy" that the experts look down upon.

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AB - Great observation, Frank. There aren't a lot of edgy, exciting articles out there about policy documentation, yet it is an important part of managing a successful organization.