Money Talks … so Talk About Money

As the economy improves, the grass looks greener and seemingly higher-paying jobs tempt wandering eyes.  A recent survey by HR Solutions International Inc. found that employees often think their peers at other firms earn more.  To keep high performers, employers must do a better job of explaining their compensation philosophies and the value of their total rewards.  In the absence of information from firm leaders, employees will fill in the blanks using their imagination, which invariably leads them to believe they are not being paid fairly.

Many BV firms report that they have no formal compensation philosophy and this is certainly true of several we have worked with over the years. However, I would argue that the collective decisions and actions that a firm makes over a period of time constitutes a set of beliefs and values — a compensation philosophy — regardless of whether the firm has actually committed those ideas to a formal document.

When a firm grows beyond a handful of people it needs to formalize its salary structures. It can no longer pay workers on an ad hoc basis.  It must consider financial budgets, corporate strategy and values. People with similar responsibilities and authority need to be paid similar salaries to maintain internal equity.  Pay also needs to be maintained with external competition.

As a rule, BV firms use a mixture of the three main components of compensation in their pay plans: base pay (or salary); incentive pay, in the form of cash bonuses or non-cash awards such as stock; and employee benefits, or non-financial rewards. But approaches between individual BV firms differ widely. For example:

Some firms believe the bulk of compensation should be derived from base salaries, and compensation levels are adjusted primarily by changing the base.  Others prefer the flexibility of variable pay, and employees derive the greater proportion of pay from incentive compensation.   

Some use incentive compensation firm wide, while some only apply incentive compensation to a very small group of employees who are believed to have the most significant impact on the bottom line.

Some firms seek to pay “at the midpoint” while others strive to pay at the top of the market, thus enabling them to attract the highest caliber employees.

Some firms choose to offer base pay below midpoint, but use employee benefits, perks, status, recognition, firm culture and work-life balance as a substitute for, or complement to, monetary compensation.

By law, pay practices must be consistent, must not discriminate, and must not be arbitrary. Yet a pay philosophy may include different approaches for different types of employees.

A firm might decide to pay a competitive rate for most jobs, but an aggressive rate for positions that are especially difficult to fill and important to the bottom line.

Some firms are more generous to certain levels of employees, while other organizations believe in widespread pay equity across all employees.

In firms that foster and reward individual effort, employees sink or swim on the basis of their individual performance.  Other firms promote team effort and risk sharing.

A well-crafted compensation philosophy will guide the firm in attracting, retaining, and motivating quality professionals.  The challenge is to create a pay program that achieves all three of these objectives without exhausting resources.

As an example, suppose a small firm with moderate cash resources is establishing a pay philosophy. The philosophy might look something like this:

Pay a competitive base salary – not an aggressive one, but a salary comparable to what an employee could get somewhere else.

Offer equity or profit sharing in the firm to all employees, so that they can reap the rewards of the firm.

Be creative in overall compensation through the use of the incentives. For example, if an employee is below market by $20,000 in base pay, deliver market parity via a $5,000 signing bonus; a $5,000 retention bonus; and potentially a $10,000 incentive structured such that high-performance people get higher compensation.

The foundation of a successful compensation program is effective communication.  Job candidates should be aware of a firm’s pay philosophy. It makes more sense, during a salary negotiation, for an employer to say, “My final offer is $67,000, which is the market average,” than it does to say, “My final offer is $67,000, and I can’t pay a cent more.” “Can’t” usually means “won’t.”

Communication is part of retention.  Firms benefit from communicating their pay philosophies to employees because a sound philosophy consistently applied creates a sense of fairness.   Professionals must believe that their compensation system is fair – that they are compensated adequately and equitably for their contribution to the success of the firm.

Money talks. So talk about money before your employees walk.