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Compensation Plan for Business Success

Pop Quiz: Is Your Compensation Philosophy in Line with Your Business Strategy?

In a recent PayScale webinar I led titled, “Aligning Your Compensation Philosophy with Business Priorities,” I began by asking the attendees some questions to assess their commitment to aligning their employee compensation plan with business objectives. The following is the list of questions, as well as advice on how to apply the insights they bring to your current compensation planning efforts.

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The first set of questions is rhetorical and meant to point out the basic values that most all HR professionals and business owners share.

1. Are employees your company’s most important asset?

Hopefully, if you work in human capital, your answer is “yes.”

2. Do you work for an organization with a pay-for-performance compensation philosophy?

According to popular statistics, over 75 percent of organizations say that they have a pay-for-performance compensation philosophy. That sounds high, but if you think about what that means, it can cover a lot of possibilities. A company could simply vary its merit adjustments based upon performance ratings and consider that effort a pay-for-performance one.

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3. Do you believe that 20 percent of your employees do 70 percent of the work?

Is this a myth or is it true? I think it is probably a reality. There are likely certain employees in your organization who are carrying an excessive burden of the work, more so than the majority of employees.

4. Is your employee compensation program aligned with business priorities?

Hopefully, you at least think that pay for performance is important. Or, has your organization reached a level where you can say, with confidence, “our compensation program is aligned with business priorities”?

Hopefully, you answered the questions above with a “yes.” But, how true are these yeses? Your reality may be different.

Reality Check: Have You Really Designed a Compensation Plan for Business Success?

Here come the tough questions. These may make your previous yeses a little less convincing.

1. Has your company started buying cheaper products (lower quality) in the last few years?

PayScale has heard from many, many customers over the last few years that they have used pay cuts, pay freezes, furloughs and many other strategies to reduce payroll. It is true that payroll is often your largest expense of doing business. But, think about it in terms of the tools you use to do business. In a recession, do you immediately buy cheaper tools – used copy machines, low-quality chairs or less trustworthy equipment? Of course not. I would like to suggest that making dramatic cuts to employee pay is a similar concept. You have to be very careful when you make those kinds of decisions.

2. Did you give at least 10 percent of your employees an increase larger than eight percent last year?

Likely, not all of you have done that. But, you likely just said that there is a disproportionate value of certain employees to your organization. If they are providing disproportionate value, why would they not get a disproportionate increase? And, I’m not talking about four percent instead of three percent. I’m talking about a 12 percent salary increase instead of two percent. Or, I’m talking about 15 percent instead of zero percent.

When companies say they have a pay-for-performance culture, it’s likely that employees would not agree that the difference between three and four percent is pay-for-performance. That just doesn’t lend itself to driving performance measures.

3. Have you given a cost-of-living salary increase to employees?

I have developed some very strong opinions through my years in HR. One particularly controversial one is this: I absolutely hate the concept of a cost-of-living increase. I don’t understand it whatsoever. The fact that bread and gas cost more has nothing to do with your company’s business priorities and how it rewards its employees.

We’ve gotten so into this status quo way of saying that everyone deserves an increase for being here a year longer. No, they don’t. Performance should drive your decisions that you make, not the fact that bread costs more. That starts making us look more like a social service agency than a business. A business is a business because it has a concentration on profitability and being valuable to all of those vested interests, including employees. What is in the best interest of employees is making sure that good decisions are made and the business is growing and continues to be able to sustain all of those who are relying on it.

4. Have you redesigned your compensation program in the last five years?

Most people will say, “No, we’ve been doing the same sort of thing.” Yet, when I ask if your compensation plan is in line with business priorities, I ask if your business priorities have remained unchanged in five years, too. It’s likely that there have been changes in the economy, regulations and many other factors that drive how businesses draft their priorities. Therefore, the business has likely updated its strategic plan and short-term and long-term goals. If that is happening while the compensation plan redesign isn’t happening, how can you argue that those things are still synched up?

All of this information points to the fact that it’s time to do something different. And, by “doing something different” I mean going back to the drawing board, using what you know about compensation, what’s important and best practices, and aligning that with what your company needs from you. And, pay close attention to what they require in terms of human capital management, talent management and rewarding the human resources in your organization.


Stacey Carroll
Director of Customer Service and Education

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Stacey Carroll
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