Is Your Compensation Philosophy Active or Passive?

untitled55Philosophers probably have a difficult time with our definition of “philosophy.” Most resources will tell you that a compensation philosophy is a statement explaining the company’s position about pay. For most of the companies who take the time to write a philosophy, the result tends to look something like this:

“Our compensation program is intended to attract, motivate and retain talent employees. Our goal is to target base pay at the 50th percentile for employees who meet expectations. We offer various incentive and recognition programs that are designed to provide compensation for the achievement of company, team and individual objectives. Our principles include striving for internal and external equity, focus on stated corporate objectives, alignment with investor interests and maintaining or building our position in the marketplace.”

What if I told you that a philosophy was not a statement, but an activity?

Here’s an explanation of philosophy by Philip Pecorino, PhD.

“Philosophy is not simply a theory about something. Nor is Philosophy a belief or a wish.  Philosophy is an activity: a quest after wisdom.  Philosophy is an activity of thought.  Philosophy is a particular unique type of thought or style of thinking.  Philosophy is not to be confused with its product.  What a philosopher provides is a body of philosophic thought NOT a Philosophy. A philosopher enacts a Philosophy, a quest after wisdom.”

In other words you, my fellow compensation professional, are the philosopher, providing thought in a quest for wisdom. You are not a follower dogmatically adhering to a statement provided to explain some objectives.

Your compensation philosophy should not only explain your pay program, it should provide fodder for questions, challenge your positions and only then drive decisions. Synonyms for philosophy include thinking and reasoning. Does your compensation philosophy focus on these things?

Imagine telling your shareholders that you are going to hire world-class talent while offering median pay. Unless you have some other magic at your disposal (like an incredible culture, or the only job in town) your investors will be sorely disappointed.

Imagine your statement claims to focus on internal and external equity, but you simply follow pay data by rote. Internal equity is thrown out the window in the name of ease or expediency.

Perhaps your philosophy statement claims that safety or good governance are key principles, but every program has a target that it nearly impossible to miss. Who is at fault when things come crashing down?

The “philosophy” you publish for the world can remain a passive statement.

The “internal eyes only” philosophy that drives everything you actually do must be far more active. It must force you to question the why of every decision and create a defense of every action. It must be reflected or even magnified in your program design, pay levels and use of incentive compensation. It must defend and drive your internal and/or gender equity objectives and provide instructions for when things do not go as planned. It must be honest and define achievable objectives.

It shouldn’t be easy. In fact, building an active compensation philosophy may be the most challenging task you face at any company. There are infinite questions and few “right” answers. But, if you make this the foundation of how and why you pay you fill find that your pay programs achieve their goals far more often.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including a recent Performance-Based Equity Compensation issue brief. He has co-authored Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives and other books. Connect with Dan on LinkedInOr, follow him on Twitter at @Performensation.

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