Robert Griffard and Geoffrey Griffard
February 28, 2019
What is your company’s compensation philosophy? Did you know that you have one?
Every company has a compensation philosophy. Some are explicitly published by the company while others are implicit in the actions taken by various decision makers in the company. There are many who feel they have a philosophy but their employees do not agree. A 2017 survey by Payscale revealed that among their respondents, 31% of employers reported having a transparent compensation philosophy but only 23% of employees agreed
The advantages of a published compensation philosophy are obvious. Compensation actions can be viewed in light of the company’s stated compensation philosophy to ensure conformance. It not only is more difficult to ensure conformance to an unwritten compensation philosophy, but such a philosophy can change without notice and is subject to the capriciousness of the person making the compensation decision.
It is imperative to invest the time and energy to formulate a compensation philosophy that makes it clear what compensation plans are intended by the company and how they are to be developed, communicated, administered, and updated. The compensation philosophy is intended to guarantee that pay actions support and promote the company’s achievement of goals and objectives. Such an integration is hardly possible when compensation decisions are dictated by market forces alone. The philosophy should detail the company’s strategy, budget issues, short-term and long-term plans, and growth provisions.
Apart from building a solid understanding of how the company manages employee compensation, it also requires management to put teeth in its commitment to take full control of pay—including pay plan development, communication, administration, and ensuring all managers are trained in their role of compensating the company’s employees.
A compensation philosophy ensures every employee’s pay is administered in accordance with the predetermined, consistent direction set by the company. Development, maintenance, and analysis of pay ranges then become straightforward. In addition to HR’s expertise in these actions, all line managers must understand the company’s compensation philosophy so that they can make decisions in line with that philosophy—and explain to their employees how pay is determined. The education of managers and employees is central to the smooth, consistent, and orderly administration of employees’ pay, which in turn, is fundamental to the company achieving its goals and objectives for productivity, growth, and profitability.
Another benefit of a stated compensation philosophy is that it allows organizations to place themselves in the market according to the level of compensation they can afford. Organizations can become employer brands for superior talent by offering to pay fat pay checks and incentives for the same. Or they may choose to build talent by recruiting newcomers, investing in their training and development, and paying salaries that are just about the market range.
Stated compensation philosophies ensure stability and sustainability of the compensation strategy adopted by the organization. It has implications for the organizational strategy, as well as, all the other HR functions. If, for instance, compensation philosophy dictates paying market rates but training employees to ensure their retention, the learning and development function needs to be well-planned and developed to allow this. The resourcing function needs to choose internal recruitment options while performance management should reward employees handsomely for their performance.
An Example of Compensation Philosophy
Consider the following example of how a company stated its compensation philosophy.
XYZ Corp believes that our employees are our most significant resource, and our continued success depends on maximum use of their contributions. We strive to have compensation policies and practices demonstrate our appreciation for each employee’s contribution.
XYZ Corp’s compensation philosophy is to:
· Reward employees based on their contribution to the company’s success.
· Consider on-the-job performance as a primary factor when determining changes to an employee’s pay.
· Provide employees with compensation opportunities that are competitive within the market.
· Provide employees with compensation opportunities that are equitable within the company.
· Ensure that all employees and management understand XYZ Corp’s policies, plans, and programs that govern compensation.
When paired with an effective communication plan, the XYZ Corp compensation program supports, reinforces, and aligns with our mission and values, business strategy, and operational and financial requirements. Our compensation program balances the needs of both employees and the business, with a goal of growth and profitability.
The XYZ Corp compensation program is designed to attract, motivate, and retain talented employees who drive the company’s success. We strive to provide base salaries that are competitive and appropriate for the market. Each position is assigned a pay range as determined by XYZ Corpbased on the position’s duties, responsibilities, and qualifications. The pay range is a reflection of what the market pays for the same or similar positions. The pay range minimum approximates the 20th percentile of the market while the pay range maximum approximates the 90th percentile of the market. The pay range midpoint is an average of the minimum and maximum.
Note: Deciding to use specific percentiles of the market to set the pay range minimums and maximums is a major step in the evolution of a company’s management philosophy. Not only does this decision require a solid understanding of how the company manages its employee compensation, it also requires management to plan all details of the compensation policy, be committed to it, and train its line managers to handle regular compensation issues. Whether to use the percentiles in the above example (20th and 90th) or any other should be a matter of enlightened discussion and definitive action by the company’s management team.
The Compensation Philosophy can be extremely potent given the sophistication of today’s pay surveys. It is not only possible but obligatory that a company’s compensation philosophy state the range minimum and maximum as explicitly defined points in the market. The midpoint then becomes just an average of the minimum and the maximum.
A compensation philosophy can and should be very specific about what to pay employees with the basic qualifications for each position, as well as, what to pay employees with outstanding qualifications. Telling your top performers that their pay opportunity is up to the 90th percentile, for example, can provide reason for such employees to invest a significant portion of their careers at your company.
Selecting a percentile at the lower end of the market data should be done with an understanding of the qualifications of employees whose pay is at the lower end. There is a point below which employees have less than minimum qualifications and minimum performance. It is possible to argue that that point is the 10th percentile or the 15th percentile or the 25th percentile. A company must arrive at this decision with the same level of sagacity as it used to determine the range maximums.
Each employee’s position within the pay range is based on that employee’s skills, knowledge, and abilities as assessed by XYZ Corp, taking into consideration the employee’s education, training, experience, and performance. All employees must meet the minimum qualifications of the position. Those employees with less experience, less-developed skills, or whose performance does not exceed expectations will be paid in the lower portion of the pay range. Those employees with significant experience, fully developed skills, and whose performance meets or exceeds expectations will be paid in the middle portion of the pay range. Those employees with extensive experience, outstanding skills, and performance that exceeds expectations will be paid in the upper portion of the pay range.
Employees of XYZ Corp who are not meeting expectations are counseled to improve their performance before any pay increase is available. Employees counseled to improve their performance and who subsequently do not improve, will have their employment terminated.
In addition to base salary, XYZ Corp uses incentives or variable pay as a way to meet the strategic goals of the company. Incentive pay will be available to some employees with consideration for a number of factors and will be based on individual goals that relate to the company objectives as well as overall company performance.
In alignment with our company culture, we strive to communicate openly about the goals of the company and the design of the compensation program. The compensation process is intended to be fair and simple so that all employees and managers understand the goals and outcomes of the process.
The pay administration program at XYZ Corp was created to achieve consistent pay practices, comply with federal and state laws, and mirror our commitment to Equal Employment Opportunity. Pay decisions and reviews are made without regard to race, color, citizenship status, national origin, ancestry, gender, age, religion, creed, physical or mental disability, or any other factor protected by law.
Several factors may influence an employee’s rate of pay. XYZ Corp considers the essential duties and responsibilities of the job, market data, as well as individual and company performance. XYZ Corp periodically reviews its pay administration program and restructures it as necessary. Merit-based pay adjustments may be awarded in conjunction with superior employee performance as documented through the performance evaluation process.
Pay, bonus, and any other type of compensation information are highly confidential. You should not discuss your compensation or other employees’ compensation with anyone other than your manager or Human Resources. You should bring any pay-related questions or concerns to the attention of your manager, who is responsible for the fair administration of departmental pay practices. Human Resources is also available to answer specific questions about the pay administration program.
Employees will not be paid below the pay range minimum unless there are issues related to the employee’s qualifications or performance. Employees will not be paid above the pay range maximum unless circumstances exist where an individual is required to fulfill specific needs of the company. Such needs may be a stated project or a specific goal to be realized in order for the company to achieve its goals and objectives. Paying below minimum (green circle) or above maximum (red circle) requires the approval of the VP of HR. Such approval will be based on the stated project or goal and upon a course of action to adjust the employee’s pay and/or classification following the achievement of the project or goal.
Managers are responsible for ensuring job descriptions are up to date for the positions that report to them directly or indirectly. HR reviews and approves the job descriptions and maintains copies for use in determining the market pay for the positions. Pay ranges are reviewed annually with respect to market pay and are adjusted to the appropriate levels for the upcoming year.
Individual employee performance is assessed through the Company’s Performance Management Program. Pay increase budgets are established based on market pay movement and the company’s finances. Based on the budgets and employees’ performance, pay increase recommendations are submitted to HR for review. Following its review, HR submits the recommendations to Management for review and approval. Approved pay increases are then communicated to employees by their manager in one-on-one meetings following the direction provided by HR.
This example shows how an organization can spell out the objectives, goals, and purpose of its compensation policy while also declaring the privacy and other ethical dilemmas that may arise in the future. By declaring all these aspects in detail, the company now not only possesses a clear direction, it is also more likely to formulate its resourcing and reward management decisions in the same vein. This will allow a well-integrated HR framework that can strategically support the organization.
When deliberating and deciding on a compensation philosophy, it is necessary to answer the following key questions:
· Is the philosophy equitable, i.e., does it discriminate among employees on any non-work-related criteria?
· Is the philosophy legally defensible and fair?
· Is it possible to tweak the compensation policy based on labor market changes?
· Is it possible to communicate the policy to employees and the general public?
· Where does the firm’s philosophy stand when compared to its competitors?
· What will be the compensation mix – fixed salary components vs variable? Performance based pay? Group incentives?
The answers to these questions will yield a well-drafted compensation policy that allows the organization to place itself in the desired market position as an employer, possess the right compensation mix, build a focus on rewards, and ensure differentiation among performers and non-performers.
Low, T. (2018) Comp is culture: 2017 Compensation Best Practices Report. Available at: https://www.payscale.com/content/report/2017-compensation-best-practices-report.pdf.
Hold on there. Can you fire someone because you don’t like their attitude?
Of course, if you ask your employment lawyer, you won’t get a “yes” or “no” answer. You might get “yes you can, but…” or “no you can’t, unless…”. Using full sentences might be “yes you can but prepare to be sued” or “no you can’t unless you can prove that the employee’s attitude made it such that they did not perform their duties and responsibilities at an acceptable level”.
Even then the reason for employment termination would be the non-performance, not the attitude.
But wait a minute, many man managers complain about employee attitude because they observe behavior that is easily described as bad attitude (demeanor, posture, mindset, mentality, mood, tone, etc.).
At Perfecting Employee Performance (PEP) hrpep.com, we use attitude as one of our performance metrics. As with all performance metrics and competencies, we have defined what we mean with the following.
Demonstrates positivity by affirming those aspects of the work to be done that are beneficial to the Company, its employees, and its customers. Helps others demonstrate positivity. Is cooperative with all levels of employees. Demonstrates and tolerates nothing less than complete integrity and forthrightness. Stimulates teamwork in others.
This definition puts “attitude” into a context that can be communicated by a manager to an employee so that the employee knows clearly what how they are expected to perform their work. The manager uses this to coach employees who do not demonstrate the stated behaviors.
When a manager labels an employee has having a bad attitude, the manager is abdicating responsibility for coaching that employee. not capable articulating what is really meant.
Establishes meaningful and achievable goals for employees so that they know what is expected of them. Communicates and reinforces behavior competencies so that employees know how they are to perform their jobs. Motivates employees to meet or exceed performance measures. Finds creative and innovative ways to sustain performance. Develops employee capabilities and provides opportunities for employees to grow in their capacities. Coaches employees by providing frequent instructive feedback and listening to input from employees.
Has the term “living wage” come up when discussing employee wages within your organization? What exactly is a living wage, and how can it affect your business?
What is a Living Wage?
A “living wage” is the wage an individual must earn to afford an adequate standard of living, based on the individual’s location, household size, and number of working adults. Those earning a living wage should be able to afford sufficient food, shelter, and other essential needs for their families.
The living wage varies by state, city, and county and is based on the Living Wage Calculator, developed in 2004 by Amy Glasmeier, a professor of economic geography and regional planning at the Massachusetts Institute of Technology (MIT).
Living Wage vs. Minimum Wage
People often confuse living wage with minimum wage, but they are not the same.
Congress created the federal minimum wage to prevent American workers from falling into poverty. The minimum wage is roughly based on poverty guidelines, but unfortunately, it has not kept up with rising living costs and is often well below local living wages. The current federal minimum wage for covered nonexempt employees is $7.25 per hour. The minimum wage is legally mandated and must take into account business needs and overall economic impact.
(This does not apply to self-employed individuals, who can actually work for as low as $1.00 per hour.)
The living wage, by contrast, is generally notlegally mandated and focuses on average living costs for individuals and families.
(If your organization works under municipal contracts, receives public economic development funds, or is located in areas that have benefited significantly from public investment, you may be legally mandated to pay a living wage. Learn more here.)
How is the Living Wage Calculated?
As mentioned earlier, the living wage is based on MIT’s Living Wage Calculator, which factors in the following local costs: food, childcare, health insurance, healthcare, housing, and transportation. This calculation is based on what a single individual must earn, and it assumes that person is working full-time.
The calculator shows the living wage for counties in all 50 states. MIT updates the calculator during the first quarter each year.
Why Does Living Wage Matter?
There are many reasons why a business would want to be aware of the living wage in the location where it employs people.
According to a study by The Peterson Institute for International Economics, paying employees a living wage or higher generally:
- Increases employee productivity
- Attracts more qualified hires
- Reduces need to micromanage employees
- Reduces employee turnover
- Improves employee health
In their article “Why ‘Good Jobs’ Are Good for Retailers,” the Harvard Business Review contrasts “vicious” and “virtuous” labor cycles.
Businesses that follow the virtuous cycle pay employees higher wages and experience lower turnover, fewer mistakes or accidents, and attract more productive workers.
Businesses that fall into the vicious cycle pay low wages and experience high turnover, frequent mistakes and accidents, and disengaged, unproductive workers.
Supporters of paying a living wage claim it grows the economy by enabling workers to buy more goods and services.
However, adjusting your organization’s wages to more closely match the living wage has potential drawbacks. Some opponents of the concept of a living wage argue that the calculator cannot effectively account for the many choices each family makes, such as gardening or family childcare.
Other opponents point out that the greatest burden of paying a living wage falls on small businesses and individual employers, who have fewer options to offset increased expenses.
An important note: The wage for jobs requiring specified skills, education, and qualifications should be based on the cost of labor instead of the cost of living. A Compensation Analyst or Compensation Consultant can analyze what employers are currently paying and determine the prevailing wage or the market rate.
Living Wages in Idaho
How does Idaho rank in terms of living wages?
A search of the Living Wage Calculator shows that the living wage for a single adult with no children is $14.12 per hour, or a full-time salary of $29,370. A family of four in Boise, Idaho with a single income must earn $31.86 per hour, or a full-time salary of $66,269.
By comparison, Idaho’s minimum wage as of 2021 matches the federal rate of only $7.25 per hour, which is barely more than half the living wage for a single worker.
There are substantial differences from state to state and from city to city. The chart below shows the living wage for a single adult with no children for various locations.
Your business should be aware of the living wage for your area. It is a tangible data point in determining what a company should pay employees. Just as companies cannot be expected to sell products for an amount less than it costs them to produce the product, companies cannot expect employees to devote their full working time for less than it costs them to pay their living expenses.
As a reminder, the living wage is calculated for full-time jobs. It is not meant for full-time students, temporary employment, seasonal work, or part-time jobs.
Continue to be mindful of how the living wage affects your organization. The large gap between the minimum wage and the calculated living wage will likely continue to have potential repercussions going forward.
Marcus Buckingham wrote an article published in the February 9, 2015 issue of Harvard Business Review titled "Most HR Data is Bad Data". He asks the question, "If you were my manager and you watched my performance for an entire year, how accurate do you think your ratings of me would be on attributes such as my “promotability” or “potential?”
What Marcus Buckingham is saying is that no one can rate another person and therefore rating systems are of no use. He states that "The research record reveals that neither you nor any of your peers are reliable raters of anyone. And as a result, virtually all of our people data is fatally flawed." He goes on to cite research conducted over the last 15 years and documented in the Journal of Applied Psychology and Personnel Psychology in which it was found that ratings done were more reflective of the rater than of the person being rated. " Bottom line: when we look at a rating we think it reveals something about the ratee, but it doesn’t, not really. Instead it reveals a lot about the rater."
Marcus Buckingham, like many academicians and theoreticians, over shoots the mark. He is trying, through research and studies to predict future performance in abstract terms. Meaning that he is looking at the more esoteric attributes of employees. Many companies have fallen into this trap thinking they are more advanced or sophisticated and are molding employees in the image of the "founder" or some other fictitious profile.
They think they should be able to foretell if a person will be successful beyond what the person is currently doing. While such endeavor would not only be nice, it would be miraculous. If someone could devise a prognosticating system to do this, that person would become wealthy selling it to companies.
The problem is the focus. The studies Mr. Buckingham cites focus on factors like "promotability", "potential", "competency", "strategic thinking", "adaptability", "assertiveness", "motivation", "creativity", "initiative", etc. These factors are subjective and yes, rating them or teaching someone else to rate them is difficult if not impossible.
Effective performance management systems focus on results using factors that can be measured and rated. For example, "productivity", "accuracy/quality", "job knowledge/skills", "planning", "communication", "problem solving", "teamwork", and "people management" are Performance Metrics that can be observed. For productivity, did the employee get his/her duties/responsibilities completed in the time frame given? Did he/she escalate issues properly and timely? Did the employee seek additional work when done with regular work? Did the employee demonstrate a sense of urgency in accomplishing work? All of the above Performance Metrics can be used to communicate expectations to employees. Employees can be coached to achieve success with these metrics. Managers can be trained to rate employees' results in each of these metrics.
The key is to keep it simple and focus on results and achievements, not abstruse and subjective factors.
The next question should be, "then what does a company use to help determine promotions and rewards?" The best predictor of future performance is past achievement. If an employee has achieved sound results in the past, then provide the opportunity to take on more. This is not fool proof, but it is more sound than using factors with unintelligible definitions, subjective measurement, and unproven value.
There are three primary actions steps in an effective Employee Performance Management System.
· Communicate Expectations - set performance goals (what you want the employee to do) and set performance metrics/competencies (how you want employees to do their jobs)
· Coach for Success - daily observation of results with appropriate feedback and documentation
· Recognize Results - fair, objective, timely evaluation
In three basic steps, employee performance management is made simple. As Leonardo da Vinci said, "Simplicity is the ultimate sophistication."
There are practitioners of performance management who focus all or almost all on coaching. While coaching is critical, it is not everything that is needed to successfully manage performance. Coach for Success means the frequent interaction between the manager and the employee. This is where the manager observes actions, sees achievements, and sees areas needing improvement. The manager should be continually providing feedback to the employee so that the employee can make changes in order to achieve the desired results. If an employee is "surprised" at year end by his/her performance rating, the manager has failed to properly coach the employee. Year end is too late for the employee to make changes.
A point of irritation or frustration to managers and employees is that at year end, it is difficult to remember everything that occurred during the year. Assessments often are superficial and focused on the last couple or few months. Perfecting Employee Performance has a feature called PEP It is a 24/7/365 continuous coaching tool for managers and employees to be in constant communication about progress toward goal achievement. It is mobile-enabled communication between manager and employee providing an archived coaching/performance record as empirical backup for performance appraisals and which eliminates surprises for both managers and employees. PEPtalk is the reigning tech-based coaching tool on the planet. Recognizing the employee’s results is streamlined using PEP’s automated online self-evaluation and online manager evaluation. With PEP providing a record of coaching communication between employee and manager, completing the evaluation is simple.
Performance measured improves performance. Performance measured and reported, quickens improvement.
Exchange of Vows:
Just what is 360-degree feedback?
What’s GOOD about it?
The 360 strategy can provide insights into an employee’s leadership ability, customer service satisfaction, and readiness for advancement.
What’s BAD about it?
When multi-source feedback is used for appraising—but not developing—employees, they may feel it’s merely an excuse to refuse them incentives or promotions.
What’s truly UGLY about it?
Multi-source reviews don't give a full picture of performance. 360 reviews provide only a snapshot—performance must be examined continuously.
To 360 or not to 360?
360 feedback can enhance the information gathered directly by the supervisor but shouldn’t replace it.