I sat down to discuss the relative merits of building a salary structure based on either internal evaluation or market surveys. As is typical, for me anyway, while on my way to one place I get interestingly sidetracked somewhere else.

Obviously your structure begins with your compensation philosophy. At least it appears obvious to me. What we find through repeated conversations with clients and prospective clients is that an uncomfortable majority can’t always articulate their firm’s philosophy.

So typically we’ll ask; “What is the policy?” This hopefully clears up any confusion that might arise over using one term in place of another. What often results is more confusion, and a discussion about what policy is and how it might be different from philosophy. So it appears I’m not the only one confused.

Briefly, we use the term compensation philosophy to mean the statement of organizational choices that reflect the alignment of strategic business perspectives driving the compensation decisions. We define compensation policy as the specific drivers that provide the framework for decision making.

What strategic perspectives? What I tell my students is that strategy is identifying the questions that need to be answered in order to achieve certain objectives. For business, you have to identify specifically:
•       What business (or lines of business) should we be in?
•       How do we achieve competitive advantage?

For HR strategy this means we have to ask ourselves:
•       How should HR help?
•       What total compensation philosophy helps the business win?

Let's consider some examples based on three major business types.  For a business that focuses on innovation, they would typically target a competitive advantage of product leadership.  The obvious HR alignment would be talent acquisition and a resulting compensation philosophy might include paying above market, value for technical expertise and rewarding innovation.

A cost cutter business type would emphasize operational excellence, and have a an HR alignment of cost focus.  The resulting philosophy would include paying below market value, emphasis on work specification and increase variable pay options.

The final business type, customer focus would prize customer intimacy with an HR alignment around talent retention.  The resulting philosophy might emphasize strict market adherence, value customer contact skills and customer satisfaction-based iincentives.

Your policy considerations typically include the careful consideration of the following aspects:
•       Internal alignment – job analysis, evaluation and description
•       Competitiveness – market definition, surveys and structure
•       Compliance – regulatory concerns
•       Management - performance management
•       Communication - guidelines for implementation.

Hopefully you can clearly communicate your philosophy and policy now, and I won’t be so hopelessly confused.

On a more practical note, having a clear and written compensation philosophy with associated polices provides management with a focused implementation path, and more flexibility to achieve company goals (it also helps keep the board off your back)!