Should your firm have a compensation philosophy? Experts say yes.
As diversity and inclusion continue to be a priority for firms nationwide, many have prioritized pay equity. One way that firms can get closer to their goal? Transparency around their compensation philosophy.
A compensation philosophy is a statement that communicates the overall direction of the firm’s compensation or compensation programs. In 2019, 70% of firms either had a compensation philosophy or were working on creating one for their firm, according to Payscale.
“[A compensation philosophy is like] a North Star for making decisions related to compensation,” says Catherine Hartmann, rewards practice leader for North America at Willis Towers Watson. “It’s the foundation that you lay for your compensation strategy, design and implementation.”
Compensation philosophies will differ for each unique organization, depending on factors like financial positioning within an industry, the size of the firm or the geographic location of the firm.
Kathryn Neel, managing director at executive compensation consulting firm Semler Brossy Consulting Group, says that these statements can help identify the focus of a firm’s compensation program.
“Without a compensation philosophy, I've observed that compensation decisions may be more ad hoc and lacking organizational consistency or a clear purpose,” says Neel. “A philosophy helps keep parties grounded in the objective of the compensation structure… everyone from the compensation committee and senior management team down to lower levels of management and then the participants in the programs themselves.”
While a majority of survey participants noted that pay transparency is of increasing importance at their firm, 27% of firms surveyed by WorldatWork have not shared their compensation philosophy with employees.
Utah State University is one in a growing number of public sector organizations that has made their compensation philosophy and other compensation information publicly available on its human resources website.
Matt Perry, a compensation specialist at the university, notes that public pay transparency pages are becoming more common in the public sector 一 other universities like Stanford University and the University of Minnesota have public sites outlining various compensation policies.
“People want information,” says Perry. “If they don't receive it from a reliable and valid source, they speculate. Communicating our compensation philosophy is an attempt to engage the employees and communicate the message that the university values their talent, to hopefully improve employee morale.”
This lines up with the broader industry. Willis Towers Watson found that 48% of employers globally were planning to take action in the next three years to increase transparency surrounding compensation. Hartmann found that the pandemic has increased the level of attention paid to compensation program design.
“We’re seeing a renewed interest in terms of looking at things like philosophy and strategy,” Hartmann says. “[Firms are] sensing that if they get some of this right, they're not going to be prepared for the next moment. This might not be the last time something like [the coronavirus] happens, so how do you better strengthen yourself? What does that mean for our longer term sustainability?”
For firms interested in implementing a philosophy, Hartmann typically councils clients to consider five primary considerations: competitive positioning, segmentation, performance orientation, affordability and governance.