A Function of Philosophy, Budget and Data
Often leaders of businesses look at their compensation packages and they realize there is no strategy. They chose the pay packages for their team without a philosophy, without truly understanding the budget and they never looked at data. The decision was “just made” to satisfy an immediate need.
Great compensation strategies are the direct result of a great philosophy on how the business is run, with laser focus on long-term budgets and access to statistically significant data. Here is how it should look.
Philosophy- Every business leader has a philosophy that they live by in all aspects of their business. Generally, philosophies break out into 3 main categories of thinking:
1. Keep up with the Jones’s- The Jones’s are a tough group as we always seem to be chasing them. Often, we do not know why we are chasing them, it just seems like to right thing to do. If it is good enough for them, well then it should be good enough for us.
Here is the secret to know about this philosophy, the Jones’ are doing what they do as part of their own strategy. Emulation may be a gamble because what works for them may not work for you.
2. Leader among peers and rivals- Usually when a business leader takes this approach, it can be felt in their business. Everything they do is meant to be a leader in their industry. The quality of the products and services, the marketing, the office space, the people, on and on.
This philosophy should be supported in their pay structure as a leader in an industry, typically they are paying for talent.
3. Keep me in compliance- Although compliance is always a goal and must be achieved and maintained, often this may lead to a misalignment of pay strategy.
Again, understanding the philosophy of the business is an important. Making the philosophy a part of compensation approach is a great first step.
Budget- As an executive, there is usually one or two missions of the business and they are profitability and sustainability. Without these two, executives can find misaligned compensation plans which do long term damage to a business.
It sounds silly to say, but compensation levels are directly tied to the budget. If the executive is looking at a budget today and makes a hiring decision, that could end up being a big mistake six months or in a year.Budget discipline and long-term planning should be one of the pillars of any business’s compensation strategy.
Finally, there is data. How has the executive benchmarked the job and PayScale against similar positions, in the same area, for the same sized business. For example, if you are paying 20% more for your positions than everyone else in your field. This could create an entire set of new problems if these were random decisions rather than part of the bigger picture.
The data is critical to either help formulate a pay philosophy or to make sure the executive is on target with their overall philosophy.
To sum it up, every business must determine their overall business strategy Once that is done, it is essential to connect philosophy, budget and data to support the strategy.