How to Use Compensation Plans to Drive Company Culture

Your compensation philosophy--written, unwritten, or unknown—drives your organizational culture. It doesn’t matter if you pay for performance, loyalty, or effort—it defines how you value employees and what they do. You get what you pay for.

The latest annual Payscale reported a chasm between perceptions of employees and management. Only 20% of employees think their pay is fair, but 44% of employers do. What causes us to pause is wondering what the 56% of companies who say compensation isn’t fair are doing about it. Do they publish a compensation philosophy and strategy? Are they reviewing their compensation plans?

A WorldatWork survey reported that over 90% of companies have a compensation philosophy, but only 53% of their employees understand it. Only 63% have their philosophy in writing. As McCloud would say, “There ya go.” For decades, we have been reading reports that employees don’t trust their leaders. That makes sense to us. If they don’t understand their pay, they won’t believe managers who say it is fair.

Build a Culture of Trust

If you want to create a culture of trust, compensation is an excellent place to start, and the place to begin is a clear, concise, and transparent compensation philosophy.

There is no “right” way to define your philosophy, strategy, and policies. Every organization will be different. The following are a few general guidelines to help you get started.

Know Your People

Before you begin a compensation review, use feedback tools and your people analytics team to understand what motivates your people. Benchmark surveys are useful food for thought, but they won’t tell you what your people want and what your business needs.

Start with Understanding

A compensation philosophy explains one or two short paragraphs how your organization views employee compensation. It explains why the philosophy is what it is and explains how the business strives to achieve consistency and fairness. It explains the competitive market position and how the company balances competitive position, talent needs, and ability to pay.

The philosophy should reflect the organization’s purpose and mission. Express it in general terms, so it does not need major revision when you need to change a strategy.

Employees will see through an evasive message. A philosophy that doesn’t reflect current practices will require a statement about addressing the disconnect.

If you can’t pay market rates, as often happens in non-profits, explain why.

Define the Strategy

Philosophy is the mission and purpose; strategy is the execution. Plans may change frequently, and a change may trigger a compensation review.

• Define each pay strategy and what it intends to achieve.
• Determine the structure or each pay plan and what market benchmarks you will use. Most organization use several, and will often use specialty market surveys for in-demand skills.
• Explain each component of total compensation in simple language.
• Show how you will measure the results and ask for feedback.

Write the Policy

Create the compensation policy in the same manner as other directives. This is the document that puts the philosophy into play. It provides the framework for the compensation strategy and pay plans.

• Include the compensation philosophy and strategy.
• Explain the process used to determine internal equity. If the policy includes specific initiatives, such as gender equity, cite them here.
• Define compensation management responsibilities.
• Include payroll policies and schedules.

Transparency Matters

It won’t matter how well you construct your plan if employees think you are concealing information. We know few organizations have achieved the level of trust where they can publish every person’s job, grade, and salary, but you can explain how decision are made.

Write your communications and directives in plain language that anyone can understand. If you need to, get help from your Marketing writers or hire a professional. The language should be no higher than an 8th grade level on the Flesch-Kincaid readability scale. Many managers have difficulty communicating compensation decisions to their employees. Make yours so easy to understand they don’t need explanation.

We recommend you implement an instant feedback tool if you haven’t already. There are many options available, and you can embed them in the tools your employees use every day. Encourage every executive leader to take part in answering questions. That conversation will open lines of communication you never thought possible.

See how Pixentia can help you choose the right compensation planning tool for your unique business needs.

Pixentia is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.