Develop a compensation philosophy
Developing a compensation philosophy can support an organization in developing a program that is in line with the work culture an organization has or wants to create.
A compensation philosophy is developed to guide the design and complexity of your compensation programs; this is done by identifying your goals and objectives, considering your competitiveness in attracting and retaining employees, your emphasis on internal and/or external equity, and whether performance is tied to pay increases. Understanding what balance you want to achieve between direct and indirect financial compensation is critical in developing your overall total compensation approach.
A consistent philosophy provides a strong foundation for both the organization and the employee. Without a philosophy, leaders often find themselves unsure of what to offer as a starting salary for a new employee. This can lead to offering too high a total compensation package for a new employee in relation to existing employees, or being unable to successfully hire because the total compensation offer is too low to be competitive.
Questions to consider when developing your Compensation Philosophy:
What do you want your compensation program to do to help your organization succeed?
Where do you want your organization to sit regarding compensation as compared with your industry or market? Your relevant labour market is defined as those organizations, usually in your geographic area, with whom you compete for labour. You have three choices: Lead, lag or match the market. The figures below are normally derived from salary survey data.
Lead the market: i.e. positioning at the 75th percentile where 75% of your comparators pay less. This is for high paying employers. It is also referred to as P75 or Q3 (third quartile).
Lag the market: i.e. positioning at the 30th percentile, where 70% of your comparators pay better. This is for employers who cannot afford to pay more for labour.
Match the market: i.e. positioning at the 50th percentile (median), where half of your comparators pay less and half pay more. Most non-profit employers like to be competitive and will target to pay at this level. It is also referred to as P50 or Q2 (second quartile).
Are you ensuring that you demonstrate fair, equitable and competitive pay practices?
How do each employee’s talents link to the organization’s goals?
What is your organization’s capacity to pay? What are the restraints on that capacity?
Sample Compensation Philosphy
While maintaining fiscal responsibility, our organization is committed to compensating staff in a manner that is fair, consistent, reflective of the external market, and provides recognition for the achievement of individual goals, corporate objectives and professional competency. Specifically, our goal is to achieve the following objectives:
- Internal Equity
- External Equity
- Increased Performance and Productivity
- Compliance with Laws and Regulations
- Administrative Efficiency
Your philosophy should be consistent with the size of your organization. If you have a small to mid-size employee base, keep your strategy simple and easy to administer. Ensuring your compensation guidelines are clearly communicated and consistently administered is a key to success.
Using equity or fairness is a key component to creating a successful compensation and rewards program. Organizations can support equity by:
- Ensuring that all employees in an organization are being treated fairly
- Developing salary ranges that are relative to where an organization wants to be in the market
- Rewarding employees according to the relative value of their jobs within an organization
- Determining Salary is based on the job requirements and not on the skills and performance of the employee
Perceived inequity or unfairness can result in low morale and loss of organizational effectiveness. For example, if employees feel they are being compensated unfairly, they may restrict their efforts or leave the organization, damaging the organization’s overall performance.
Internal Equity is the term used to describe fair compensation with respect to how different positions within the organization relate to each other. It is the relative ranking of all jobs to each other based on their value to the organization. Internal job to job comparison is based on job analysis, job descriptions and job evaluation / classification.
An internal equity study can determine if there is equity between like-positions and if all roles in the organization are governed by the same compensation guidelines. Job evaluation is the process of determining the value of a job within an organization relative to all the other jobs in that organization.
External Equity is the term used to describe fair and competitive compensation with respect to the market value of a job. It is the average level at which your organization pays relative to the outside labour market. This is determined through market definitions (defining your relevant labour market), salary surveys, and your pay policy decision (where you wish to pay relative to the market).
The use of salary surveys is critical in your ability to determine if your compensation and benefits are comparable to similar roles in other organizations. It is important to ensure that the key responsibilities and goals of the roles being compared are similar; as is the sector the organization is aligned with.
Employee Equity refers to fairness in compensation among employees in the same job, or whose positions are classified in the same job grade or level. This does not mean that all employees are paid the same, it means that they are paid fairly in relation to other staff in the same role. Differences in salary may be based on job required education, relevant experience, years in service in the job, starting salary, or responsibility level.
Pay Equity is the difference in pay between males and females. At first, pay equity meant equal pay for equal work, the premise that individuals should be paid the same for wage for the same kind of work regardless of gender (or age, color or religion). The concept later evolved to equal pay for work of equal value. Women and men must receive equal pay when they are doing substantially the same kind of work, requiring the same skill, effort and responsibility performed under similar working conditions in the same establishment. In many jurisdictions a formal Pay Equity Plan is legally required.
Pay Equity Legislation
Quebec and Ontario are the only provinces that have proactive pay equity laws and cover both the public and private sector. Other provinces and territories have pay equity legislation that only cover the public sector, do not require maintenance of pay equity, or solely have provisions in their human rights laws.
Once the over-arching compensation philosophy has been aligned with your strategic plan and organizational culture, the next step is to determine the optimal mix of the various components of the Compensation Program. These include:
- Wages and salaries
- Direct Benefits
- Indirect Benefits
Some questions to consider when determining your organization’s optimal mix include:
- Do some employees earn hourly wages and others salary? Why, why not?
- Are hours of work different for one group over another? Why, why not?
- Do employees have the ability to earn: flex time, lieu time, over time, is it different for one group over another? Why, why not?
Flex time refers to time that an employee has earned by working a longer week than required. Compressed workweeks are often used to offer employees reduced hours.
Overtime is time that a person works in excess of their scheduled and required time. For hourly paid staff, this may be paid out to them (for example, at a rate of 1.5 times their normal salary). For management staff, an overtime agreement is usually in place that identifies that salaried employees do not receive pay for their overtime hours, but “lieu time.”
Lieu time is time that an employee earns by working in excess of their scheduled hours due to the demands of the job/day/situation. Lieu time is typically calculated as hour for hour.
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