What is Your Compensation Philosophy?

Can you describe your company’s human capital business model?

Most business owners struggle with the answer to this question. On the surface, the answer may seem obvious: “Of course I can! We pay fair, market wages and reward superior performance.”  Dig a little deeper, however, and you’ll begin to see why there’s never been a better time to think through the answer to this question in much more detail.

Let’s list a few examples that nearly every high-growth CEO is forced to navigate:

  • You have an opening on your Account Management team that’s a result of a huge new customer win. If you don’t fill the role by the end of the month, you can’t launch your new customer.  Your internal recruiter has brought in a candidate who looks absolutely perfect for the role, but their current base salary is $30,000 above the base salary of the other members of that team.  They can start immediately.  What do you do?
  • Your most tenured front-end engineer – a critical member of your development team, with highly specialized knowledge – comes to you stating that they have received an offer from another firm for 20% more than you’re currently paying them, along with a title promotion.  Losing them would set your product development effort back months.  What do you do?
  • Your employees have typically received a bonus equal to 10% of their base salary at the end of each year as a reward for a job well done.  This bonus has never been tied to an actual operating target, like EBITDA or revenue.  Your company absolutely killed it this year, beating your revenue plan by 10% and your EBITDA expectations by 15%.  Do you increase the size of the bonus?
  • Same example as above, except in this scenario you were on track for a killer year, but in October your largest customer, who represents 10% of your company’s revenue, goes out of business and blows a gaping hole in your budget.  Your team literally did nothing wrong, and until then you’ve had a great year.  Do you pay out the bonus in December?

If you’ve never taken the time to develop a compensation philosophy, then these questions are incredibly tough to navigate.  At best, you’re making decisions based on short-term developments.  Worst case, you’re making an emotions-based decision while under an intense amount of pressure, which can lead to inconsistent decision-making and very confused (and upset) employees.

What is a compensation philosophy? The Society of Human Resources Management (SHRM) defines it as “a formal statement documenting the company’s position about employee compensation. It essentially explains the “why” behind employee pay and creates a framework for consistency.”  A compensation philosophy is akin to a core values statement; it defines your beliefs about the why, how and what of your pay, equity and benefit plans.  Just as your core values dictate the decisions you make as a company regarding how you and your employees conduct yourselves each and every day, your compensation philosophy defines your company’s belief system regarding compensation.

Does your company intentionally pay high hourly rates or salaries relative to the market in order to attract top talent and reduce attrition?  Does your company pay below market rates but provide employee stock options to ensure everyone has a piece of the upside?  Are bonuses intended to reward superior growth or profit performance, or are they considered part of an employee’s expected compensation each year?

Nailing down your company’s compensation philosophy is a critical step in the process of building the systems and processes required to build your best possible team.  Learn how to create a compensation philosophy in detail here.