What’s the most common question asked of a compensation consultant? Probably, “How much should I be paying for a controller (or any other position)?” Or it’s cousin question: “Are our salaries ‘at market?’” I’ve blogged about those questions before. But I suggest that there’s a more important, fundamental question.
“How should we be paying our employees?”
The ‘How’ question is much more interesting because it has a greater impact on profits and growth. It breaks down to three sub-questions: (1) which pieces of compensation should we use? (2) who participates? (3) in what proportion?
- Should we use performance incentives? Yes
- Who participates? All executives, directors and managers
- In what proportion? Executives—40% of salary; directors—25%; managers—20%
These decisions make a bigger impact on the company than just the ‘how much’ answer. Why were certain groups excluded? What’s the impact on hiring? Retention? Partnership commitment? How is it balanced with other incentives and the size of our total rewards investment (TRI)?
Without a guiding strategy that links the pay philosophy to the business plan these sorts of decisions get made based primarily on budgetary factors. As a result, pay is taken for granted and plays no role in creating a unified culture and vision within the organization.
Start with a well-developed pay philosophy that is deemed worthy of a great business plan. Then build a structure that fosters strong decision-making and accountability. Everyone will see that the ‘how much’ question is dwarfed by the importance of the ‘how’ question.