#ZelleIntel Why Compensation Philosophies Matter
Pew Research Center examined why employees left their jobs in 2021, and 63% left due to low pay. Employers should evaluate their current compensation structure to ensure their pay is appropriately aligned with the market and their budget. The first step to creating a compensation structure is to have a compensation philosophy. A compensation philosophy is a formal statement that outlines the organization’s structure around base pay, percent increases, and bonuses; this is the “why” behind employee pay to establish consistency.
An organization’s compensation philosophy should include at least these four items:
Goals Around Market Pay: “Market Pay” refers to paying at a level that matches the market average salary for a specific position. A company’s compensation philosophy should outline market pay goals that establish equitable internal pay practices, competitive industry and organizational wages, and motivating retention strategies.
Goals Around Business Strategy: In determining goals around market pay, it’s imperative to consider a budget. Every organization wants to lead the market in pay; however, that’s not feasible for a majority of businesses. Organizations should identify how their values and fiduciary responsibilities can positively support their compensation philosophy.
Structured percent Increases and Bonuses: A compensation philosophy should outline the “how, why, when” for increases and bonuses. Does the organization provide cost-of-living adjustments annually? Merit increases? Both? Do employees receive bonuses? Who’s eligible? What resources help make these determinations? Do you have tangible data that supports your current compensation decisions? An organization’s strategic planning around percent increases and bonuses directly impacts its ability to retain employees and reward high performers.
Transparency: Organizations who openly talk about their compensation philosophy and goals are more likely to have employees align themselves with the vision and values.
So, what’s next?
Organizations should conduct an annual review of their compensation philosophy to ensure policies are being adhered to and current data is being utilized.
Once an established compensation philosophy is created, an organization-wide compensation analysis should be conducted. A compensation analysis provides current market data in the form of percentiles for each unique position. This information will allow organizations to make data-driven decisions based on their established market pay and budget goals. Compensation should be reviewed annually, however; compensation analyses should be conducted at least every three years.
Need assistance creating a compensation philosophy or conducting a compensation analysis? Connect with our team today, and let’s work towards your compensation goals together!
Already have a compensation philosophy?
- When was the last time it was reviewed?
- Do you feel employees are exiting your organization because of pay?
- Are you missing key strategies in your current philosophy?
- Do you need to evaluate your market data to better align with your philosophy?
Let’s talk about it.