Can You Put That in Writing?
Survey results find 67 percent of organizations have a formal, written compensation philosophy, and experts say putting these policies 'on paper' can increase the chances that such programs will be administered fairly and consistently.
By Colleen Mullarkey
Formalized compensation programs that include written philosophies, salary structures and active performance management are more prevalent now than they were just two years ago, according to a new study from Scottsdale, Ariz.-based WorldatWork.
Compensation Programs and Practices 2012 summarizes the results of a June 2012 survey, with responses from 1,001 WorldatWork members. The survey compared pay practices from 2003 onward and gathered information about current developments in compensation programs and practices.
WorldatWork's data shows that 67 percent of organizations report having a formal, written compensation philosophy -- up from 61 percent in 2010. Consulting experts have seen this trend in the marketplace as well.
Catherine Hartmann, a Mercer principal in Los Angeles, says more of her clients are moving in this direction. "As firms start to grow and expand, they really need to have a fair, equitable and competitive way to determine job level, as well as pay rates that go along with it," she says. "A more formal structure gives them the means to do this while still allowing for flexibility and how you pay the individual, depending on how you design structure."
So what do these written compensation philosophies look like and how do they benefit an organization? "A formal program generally puts 'on paper' its policies, objectives and procedures for pay and pay changes," says Kerry Chou, a senior practice leader at WorldatWork. "This increases the chances that the program will be administered fairly and consistently while lowering the possibility for wide (and potentially discriminatory) variations in program application."
Most often, HR leaders are the ones putting these policies on paper and ensuring proper administration -- but they don't go it alone. "In virtually all of the organizations that I personally consult with, HR drives (and owns) the process of designing and managing formal compensation programs," says John Bremen, managing director of Towers Watson in Chicago. "In the vast majority of cases, HR partners with line management to design effective programs that support the overall business strategy."
Bremen says he often sees companies establish design teams that include representatives from HR, finance and line management to represent the multiple perspectives across the business. Before they put pen to paper, these teams must embark on a fact-finding mission. Experts recommend getting a pulse on the organization's environment through various means, including executive interviews, employee focus groups and employee census surveys.
Regardless of which methods are used, Hartmann stresses the main focus should be on gathering information specific to the organization's individual needs and culture. "You can't just develop something that works for the company across the street, because even though that may be what your competitor is doing, it doesn't necessarily mean it's best practice for you," she says.
While these written philosophies will vary from company to company, Chou says some of the more common elements to include are:
* The organization's overall pay strategy versus the market. Where does the company want to position itself: at market, below or above?
* The type of reward elements the company will offer and what mix of these rewards it will offer (base pay, bonuses/incentives, stock or other long-term incentives, benefits, paid time off).
* How the organization determines the "value" of its positions. What method of job evaluation is used?
* A declaration, in some form, of what it takes to advance in the organization from a pay standpoint (job performance, potential, impact on the organization).
Even after the ink is dry, HR's work still isn't finished -- communication to employees regarding the program is an essential next step. The good news is that employers with a written philosophy are statistically more likely to have their employees understand it, according to the WorldatWork data.
However, there appears to be an ongoing need for more effective communication. The report indicates that while 67 percent of organizations have a written compensation philosophy, only 28 percent say most or all of their employees understand the philosophy.
Tom McMullen, U.S. reward practice leader for the Hay Group in Chicago, recommends narrowing the focus to get the point across more clearly. He finds that some organizations center their communication strategy on posting compensation information on a web portal where employees and managers have open access -- but may rarely access it.
"It is a more powerful strategy to focus on a few key reward messages that people understand rather than using the 'communicate everything and the kitchen sink' strategy," he says. "Thinking in terms of identifying a few key things that HR wants its managers and employees to know and understand about their reward programs is a much more effective strategy than ensuring they understand the details and elegance of the new program and related administrative provisions that support the program."
Nearly 80 percent of surveyed companies report they communicate pay to employees, using brief written or verbal communications, at least once a year. Experts recommend keeping employees up to date with the policy on a regular basis -- not just as part of the employee review process, but also when there have been any minor or major changes to the program.
It's also key to tailor the message to specific audiences and to utilize various forms of communication to maximize reach. "Different groups of employees at different companies require different types of communication," Bremen says. That might be a simple email or announcement on the company web portal, a letter sent to the employee's home, or it could be a staff meeting.
"More and more companies are communicating using social media, webcasts, podcasts and other instant technology," Bremen says. "And, in many cases, there is no substitute for live, one-on-one or group communication between leaders and their employees."