In the simplest of worlds, an employee effectively performs a set of tasks on an agreed-upon schedule and you pay him or her a fair wage. End of story. But, in the real world, employers need to craft a compensation philosophy: a formal statement outlining their belief system and approach to the different ways they compensate employees. Here are four compensation philosophy questions to ponder:

1. Do small annual raises for everyone really make sense? Many employers have dropped the practice of spreading around modest (for example, two or three percent) raises broadly because it limits funds available to give substantial pay raises to top performers. Often these raises are referred to as ‘cost of living adjustments,’ but the value of a job does not necessarily move in lockstep with inflation (even when inflation is low).
2. Are you using the right benchmarks? Although salary surveys can tell you average pay levels for jobs in your labor market, they can be misleading. This is because, in your own organization, an employee whose job pays, for instance, $50,000 on average in your community might be worth much more or less to you because of factors distinctive to your organization. An employee who understands his or her value to you — particularly when it is high — probably will not be content with pay that simply matches a market average.
3. What employee behaviors are you rewarding? It is important to establish a clear link between the activities you are rewarding and your strategic goals. For example, if your goal is to raise employee skill levels to equip them to assume greater responsibility, are they rewarded for acquiring those skills, or simply for performing well at their existing jobs?
4. Is your incentive system overly complicated? It may be tempting to devise a bonus system that touches on every possible metric of employee performance. But employees are not finely tuned machines that can calibrate their efforts precisely in response to a multitude of incentives. If they feel as though they are being pulled in too many directions, or do not really understand the formula, the bonus will lose potency.

After you have created, or perhaps revised, your compensation philosophy, communicating it to employees is critical. Craft a carefully-written description in your employee handbook. But do not stop there — train your managers to explain your philosophy clearly while onboarding new hires and when discussing compensation during performance reviews. For more information, please contact us.