Every company needs to know what it believes about compensation—and clearly articulate those beliefs in a written pay philosophy statement. If you currently have a statement, you will want to review it soon and make any updates that will make it more relevant. Among other things, be sure it includes “emergency principles” that define how the company will react when confronted with issues such as those posed by the economic uncertainty we currently face. If you do not yet have a written statement, now is a good time to create one. Let me rephrase that. Now is a critical time to create one. Here’s why.
When the business economy is bad, poor decision-making can be very expensive. And since compensation is likely the largest item on your P&L, making misjudgments about how and how much you pay your people can be especially costly. In fact, if you start making judgments about which pay programs to keep and which to get rid of, without defining what your rewards philosophy is, you can end up making matters worse than leaving everything unchanged—financially and otherwise. Possibly much worse.
In a stalled economy, your company leadership needs to be very clear about what results should be rewarded and what form those rewards need to take. You need to operate under the guidance of an overall philosophy that suggests employees should participate in the wealth multiple they help create. That philosophy doesn’t need to change just because money is tight right now. What needs to be clarified is the kind of value creation the business considers highest priority currently and how it intends to use the company’s compensation structure to reward that outcome.
A Pay Philosophy Checklist
A compensation philosophy statement can include anything a company wants. However, in the current environment, here are some of the things you should make sure it addresses, regardless of what else you decide it will include. (Understand that the use of the term “currently” on this list implies your answers may change in a different economy).
- How value creation is currently
- How value is currently shared—and with whom.
- How market pay standards are currently
- How guaranteed pay and value-sharing will be currently
- How short and long-term value-sharing will be currently
- How much equity (if any) will be currently shared and with whom.
- How merit pay is currently
In the current environment, your compensation philosophy should also address the following:
- A statement of “emergency principles” that define how your company organization will address potential crises. If these have already been articulated in your company, they should either be reinforced or refined.
- A statement of how cash versus non-cash compensation and employee benefits will be prioritized.
Your pay philosophy should guide all decisions you make regarding your company’s compensation and benefit offerings. If it is constructed effectively, you will find it easier to make decisions about how specific rewards plans should be constructed—and how much focus (investment) each should receive.
For more information on why a statement about your compensation “beliefs” is so important, read: Why a Pay Philosophy is a CEO’s Best Friend.