5 considerations for your compensation philosophy

By Maddy Simpson

July 30, 2020 12:28 PM

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In 2019, 70% of firms either had a compensation philosophy or were working on creating one for their firm, according to Payscale. A healthy compensation philosophy sets the tone for compensation decisions at a company.

But what if your compensation philosophy is in need of a refresh? Or what if you’re one of the firms who is trying to create a comp philosophy that fits your firm’s unique positioning in the market? Where do you start?

Willis Towers Watson’s Catherine Hartmann, rewards practice leader for North America, typically outlines five key considerations for her clients: competitive positioning, segmentation, performance orientation, affordability and governance.

Competitive positioning

Competitive positioning looks at the market around your firm, taking into consideration what peers are paying similar positions.

“Who are your peers, and how will your programs be targeted to those peers?” Hartmann says. To better understand competitive positioning, many firms participate in compensation surveys from firms like Mercer, Willis Towers Watson and Aon.

Segmentation

Hartmann says that firms should think about where they want consistency in their plan designs versus variability by segments of the firm. Compensation will vary for different roles and functions at a firm —positions in different geographies, business units and career levels may require different compensation approaches.

Performance orientation

“Different elements of the program can be intended to drive high performance culture,” Hartmann says. “[Performance orientation] is identifying what those [high performance] areas are, and what is the level of performance that's getting rewarded.”

Hartmann notes that performance can be measured for individual, team or company success.

Affordability

Affordability and cost management in a compensation philosophy helps firms prioritize where to spend their budget and understand the balance between fixed and variable costs within compensation plans, Hartmann says.

Governance

For Hartmann, governance considerations should evaluate questions like: What are the guardrails to the program? How will it tie into your diversity and inclusion plan? What are the roles of your managers in effective oversight?

“Make sure that you have a plan that addresses things like manager and HR capability and enablement to deliver on those messages,” Hartmann says. “You want to make sure that you have alignment to your broader total rewards philosophy, and your employee value proposition. And last but not least, you need to make sure it aligns to pay fairness and metrics on gender and racial equity.”