Compensation policies and why we should update them

A compensation policy should be clearly communicated throughout the organisation so employees understand how their pay is determined and reviewed.

A successful compensation strategy must be fair and transparent. The compensation policy can be supported by other policies or procedures, such as performance and salary review policies, benefits policies and employee incentive plans, to provide further guidance to employees.

Here are a few initial questions suggested by human resources specialists. Your answers may determine the next steps for your organisation’s compensation policies. They will help you establish whether an update is needed and where to begin.

• Does the compensation framework support your organisation’s business strategy?
• Are the timeframes for awarding short- and long-term compensation appropriate for your business?
• Do performance measures for annual and long-term incentives and rewards support the implementation of your strategy?
• Do annual bonuses include measures linked to the year’s main objectives?
• Are compensation levels appropriate?
• Have you adequately considered and disclosed differences between employee and director compensation policies?
• Does the compensation framework incorporate best-practice features?

These questions are far from exhaustive, but they provide a starting point. Although employers and employees have different motivations for developing and updating compensation policies and strategies, the primary purpose is to help the organisation achieve its strategic business goals and objectives.

From the employee’s perspective, the benefits include:

• The opportunity for equitable treatment of employees and their colleagues across the organisation;
• The ability to assess their value in relation to the organisation’s strategic goals and be compensated accordingly;
• Encouraging management and employees to conduct performance reviews that identify and improve work performance and productivity.

Let’s explore two of the most important reasons for updating compensation policies:

• Attracting and retaining talent and customers

Many leaders say attracting talent is a key challenge in building a successful, profitable business. A well-articulated, effective compensation strategy can attract highly skilled staff. An organisational strategy that attracts and retains high-quality talent through above-market pay can also increase brand awareness.

Consider this example: what would you offer a prospective employee with a strong market presence who could improve their new employer’s brand recognition? This is particularly relevant in legal, accounting and consulting services, where a partner may be attracted by higher compensation than their current firm offers. Winning such a key employee can bring new clients who follow them.

• Rewarding the right behaviour

A compensation strategy can also encourage and reward behaviours the organisation considers essential to success. Organisational culture shapes people’s attitudes and behaviour both internally and externally, including towards customers and in service delivery. A compensation strategy that identifies and encourages the right behaviour helps create a healthy corporate culture that leads to ethical conduct and satisfied customers.

Compensation is a good starting point for building a strong company culture. It bears repeating that the compensation strategy must be clearly linked to the organisation’s strategic business objectives. An important element is not only encouraging achievement of those objectives, but also setting expectations for how they are achieved.