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Pay 'Philosophy' Could Prompt Workers to Stay

March 29, 2011
Related Topics: Recognition, Compensation Design and Communication, Retention, Benefits

For many employees, money talks—and they’ll consider leaving if the price is right elsewhere. As the economy improves and workers’ eyes start to wander toward higher-paying jobs, recent findings suggest that, to keep high performers, employers must do a better job of explaining their compensation philosophies and the value of their total rewards.

A recent survey by HR Solutions International Inc. found that employees often think that peers at other firms earn more, but the reality is that they typically are paid about the same.

    “If nothing is said about compensation, people assume the worst,” meaning employees perceive they are not being paid fairly, says Ashley Nuese, director of marketing and sales services at Chicago-based HR Solutions. “Organizations should focus on communicating how their philosophies were developed and continuously benchmark their scores on pay satisfaction to remain competitive.”

While the vast majority of employers have developed a compensation philosophy, few of their employees are aware of and understand it. And that shroud of secrecy appears to hurt firms.

A compensation philosophy explains the values and objectives guiding compensation policies; which skills the organization rewards; whether the company pays at the median of the market or above or below it; and which types of rewards are available. For instance, the values guiding Hartford Financial Services Group Inc.’s policies include aligning its workforce’s interest with its shareholders’ interest and linking pay to performance.

In contrast, compensation policies articulate specific details, such as the size of pay increases when employees receive a one-grade promotion. Nine out of 10 companies say they have a compensation philosophy, based on a 2010 survey by the human resources association WorldatWork, and 61 percent say they have a written one. But 42 percent of employers say most—or all—of their employees don’t understand the philosophy. Those without written philosophies tend to have high turnover, WorldatWork found.

“You don’t have to be the top payer in your industry to retain people,” says Kerry Chou, compensation practice leader at Scottsdale, Arizona-based WorldatWork. But helping employees understand why companies pay the way they do helps curtail turnover, he adds.

At minimum, Chou says, a compensation philosophy should explain the organization’s desired base pay position compared with the market; the process used to determine salary grades; other types of rewards, such as bonuses and stock; and the name of the person responsible for the administration of pay programs.

“If you’re going to communicate to employees about what your pay philosophy is … the communication has to include a little bit more than ‘We’re a median payer,’ ” he advises. “An employee could misinterpret that and say, ‘They’re just paying the median, so I’m going to go work for somebody who pays more.’ ” Employers instead should place pay in the context of the total compensation package.

At RTI International, a not-for-profit research organization based in Research Triangle Park, North Carolina, employees can log onto the intranet and read about its compensation philosophy on such matters as salary structure. Employees “know what we do in terms of pricing their jobs and the salary structure that we have,” says Kristen Vosburgh, RTI’s vice president of compensation and benefits. “The more that you can publicize what you’re doing, you’re going to lessen people feeling like there are secrets behind the scenes.”

American Registry for Internet Numbers, a not-for-profit that manages the distribution of Internet Protocol addresses, formalized its pay strategy nine years ago. “Initially we were so small that, to be quite frank, there was some guesswork,” says Mary K. Lee, director of HR and administration. She referred to books, talked to counterparts at other organizations and conducted salary surveys to develop American Registry’s philosophy. The company posts a summary of its philosophy online and distributes a handbook that explains everything from pay schedules to the performance-review cycle. But Lee doesn’t assume all employees read it and says the company could do a better job of communicating it.

Managers at Hartford Financial receive training about the firm’s compensation philosophy so they follow it and can explain it when distributing bonuses or deciding merit increases. On Hartford’s intranet, workers also can read explanations of the philosophy, such as why some employees qualify for long-term incentives. The 200-year-old firm adopted its compensation philosophy just six years ago.

Karen Macke, senior vice president of total rewards and HR operations, believes a well-articulated compensation philosophy boosts morale and improves retention of employees. “While they may not agree absolutely with everything that we have,” she says, “they understand why and how decisions are being made.”

Workforce Management, March 2011, p. 18 -- Subscribe Now!

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