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4477
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The Link Between

Employee
Motivation
and Your
Compensation
Philosophy

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Do your employees understand your company's compensation philosophy?
That was a question posed to human resource managers in a recent
WorldatWork survey, Compensation Programs and Practices. According to the
survey, almost one in five employers believe that most of their employees
have a basic understanding of how their pay is determined. However, nearly
half of employers in the survey estimate that most of their workforce has little
or no understanding.

Those results might not be surprising in light of another survey result: Only
62% of employers have a written compensation philosophy document to
share with employees. Nearly one-third said they have an unwritten
philosophy, and 7% confessed they don't have a compensation philosophy at
all.

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 Common Pay Target
In practice, the majority of employers simply aim to set pay at the median for
a given job category in their labor market. But just paying a median wage, if it
can be called a compensation philosophy, isn't one that will excite most
employees if it's explained to them as such.

Still, nearly the same percentage use some form of variable pay, typically a
bonus, to reward exemplary performance. Presumably this reflects a
compensation philosophy that not all employees in the same job category
should be paid the same every year.

Though most employers tell employees (or at least imply) that they will be
rewarded if they achieve certain goals, nearly a third say they plan to give
bonuses even to those who didn't achieve performance expectations. While
such employees might appreciate the bonus, their employer loses all
credibility in the process.

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 CEO Pay Multiples
The amount of pressure on publicly held companies to be clear about their
compensation philosophy is about to explode, and it could spill over to some
smaller companies. That's because under new Securities and Exchange
Commission rules, public companies beginning in 2017 will be required to
report the ratio of their CEOs' pay to that of median employee pay.

That multiple has been estimated at 300, and executive pay has risen at a
much faster rate than typical employees for many years. When the figures
start being reported, sensitivity to how compensation levels are determined
will grow.

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Here are some compensation philosophy questions to consider, then resolve
and communicate to employees:
Are small annual raises a trap? Many employers have dropped the
practice of spreading around modest (for example, 2% or 3%) raises
broadly, because it limits funds available to give substantial pay raises to
top performers. Also, the value of a job doesn't move in lockstep with
inflation (even when inflation is low, as it has been in recent years).

Are you using the right benchmarks? While salary surveys can tell you
average pay levels for particular jobs in your labor market, they can be
misleading. That's because in your own organization, an employee whose
job pays, for instance, $40,000 on average in your community, might be
worth a lot more or less to you because of factors unique to your
organization. An employee who understands his or her value to you,
particularly when it's high, probably won't be content with pay that simply
matches a market average.

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 What employee behaviors are you rewarding? It's important to establish
a clear link between the activities you're rewarding and your strategic
goals. For example, if your goal is to raise employee skill levels to equip
them to assume greater responsibility, are they rewarded for acquiring
those skills, or simply performing well at their existing jobs?

Is your incentive system overly complicated? It may be tempting to

devise a bonus system that touches on every possible metric of employee
performance. But employees aren't finely tuned machines that can
calibrate their efforts precisely in response to multiple incentives. If they
feel as though they're being pulled in too many directions, or don't really
understand the formula, the bonus will lose potency.

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Why Communication Matters
After you've reviewed and perhaps
revised your compensation philosophy,
communicating it to employees is
crucial. They consider the manner in
which you pay them as the acid test of
what you want from them. Intangibles
matter too, of course, like the quality
and tone of the work environment.

If pay practices are a mystery, you lose

on two counts: Employees don't like
being kept in the dark, and they won't
know which behaviors will bring
tangible rewards.

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Simply describing your compensation philosophy in an employee handbook
won't get the job done. While that's a necessary starting point, discussing it
directly with employees and answering their questions, generally in the
context of a performance review, makes it more comprehensible.

Finally, be sure employees understand all of the elements of their

compensation, and the philosophy behind it. If their paychecks represent, for
example, only 70% of their total compensation when the value of benefits is
added in, it's important for them to understand that. It will also give them
something to think about if they're tempted to seek a job with another
employer because they've heard the wages are good, without knowing the
whole story.

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