There are Only Two Pay Philosophies

untitledWe, the compensation professionals of planet earth, work hard to define the whys and hows of our pay programs. We build out details on our objectives for pay levels, definitions of peers, pay mix and plan details. We define the purpose of each pay element and its alignment to the company, shareholders, individuals and in some cases, the world itself. We put all of this together into words, rules, charts and slides and call it our compensation philosophy. I have been, for as long I have worked in this profession, a huge advocate of great compensation philosophies.

Like many of you, I work hard to provide the correct analysis. I do my research and learn everything I can about what has worked in the past and what has failed. I model scenarios and educate stakeholders. I talk to employees and boards alike. I attend conferences, listen to webinars, read academic papers and network with other professionals. I even do my best to give back through the creation of articles, books, presentations and resources. I answer questions on the topic and work hard to find new ways to have people understand the importance of a great compensation philosophy.

I know that the final product should define what a company should pay for and how that pay will be used in practice. I know it ought to clearly define where the company pays relative to its market. It is no secret that it will explain the reasons for, and balance of, guaranteed and at-risk pay. And, of course, it must be clear in short-term and long-term objectives. I know this and much more. And, so do you.

This is why the next section of this article will be so frustrating.

For many (perhaps most) companies, it is far easier to explain pay philosophy than the barrage of ideas and words above. For these companies, there are only two possible compensation philosophies.

1.     “We pay as little as possible without directly and negatively impacting the success of the company.”

2.     “We pay as much as possible without directly and negatively impacting the success of the company.”

These companies may or may not be truly concerned with pay mix, market placement, pay alignment and the rest of that rigmarole (yes, it’s a real word…I looked it up.) They know that any data they get will be used to expressly support their “world-view” on compensation.

I am certain that many of these companies do not have a compensation expert on staff. I am also certain that some of them do. I have a question for those almost certainly frustrated compensation professionals who work at a company with the policy to simply pay as little as possible. How can I and the rest of your colleagues in this industry, help you get the support you need to create a more effective approach to pay? Or do you believe, as some have pointed out in the past, anyone who pays a dollar more than they absolutely have to simply doesn’t understand economics.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. Become a better business leader.Everything You Do in COMPENSATION IS COMMUNICATION” was written by Comp Café writers, Dan Walter, Ann Bares and Margaret O’Hanlon. It lays out a practical approach to communications (with helpful worksheets for each step). Dan has also co-authored of several other books you may find useful including “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.