Issues to Consider When Preparing a Compensation Philosophy Statement
- What drives profits and value in your organization? What is your profit formula (i.e, your business model)?
- How do you currently define value creation? How do you know when you’ve successfully created value? (What are the indicators?) Identify the top three value creation results. (Examples: (a) new customer development that leads to new gross revenue, (b) productivity enhancements that result in improved gross margin, (c) cost management efforts leading to improved profitability, (d) creative product development that enables us to expand sales to existing customers,(e) improved service systems that help us enhance the customer experience leading to referrals and improved client retention.)
- How do you currently reward for the results identified in #1 above? Does that differ by tier or class of employee? If so, how?
- Do your current rewards programs promote results or activities not identified in #1 above? If so, should those results be emphasized or de-emphasized?
- To what extent should the total amount paid to employees recognize: (a) tenure, (b) qualifications (including specialized skills), (c) roles (including shareholders), (d) management duties, and (e) value creation? Do you need to give special consideration to certain positions? If so, why? And in what ways
- Will you consider offering equity to key employees in the future? If so, why? How should the equity plan operate?
- If you don’t offer equity, what form of long-term rewards program do you think you should have? Who should participate? What should it be based on?
- How should you price salaries—at, below, or above our market-based peer positions? Why? Should this vary for certain positions? Which positions? Why?
- How should you position your benefits programs—at, below or above our peer group? Why? Should you provide supplemental benefits for certain groups (tiers) of employees?
- How should you use incentive plans to reward for the value creation results described in #1-2 above? Who should participate? How will you structure and manage these plans? How will you determine the relative size of the incentive opportunity? How will we communicate these plans to employees?
- What additional value do you offer your employees that is not reflected in their paycheck? Consider time off, work environment, education, etc.