Compensation Strategy Hides in Your Exceptions

Most organizations have a compensation strategy. It typically says that the organization targets the market median, rewards performance, maintains internal equity, etc.

All good things!

But if you want to understand an organization’s real compensation strategy, don’t start with the philosophy statement. Look at the exceptions they make.

Every Exception Sends a Message

I’m not against compensation exceptions. Sometimes they are necessary and entirely appropriate. What I’m not a fan of is handling them as isolated situations:

• We had to pay more to land this ‘unicorn’ candidate.
• We couldn’t afford to lose this employee.
• This role is unusually difficult to fill.

Any one of those explanations may be reasonable. But when exceptions accumulate, they begin to create a compensation strategy of their own. And that newly developed one may look very different from the strategy leadership intended.

Employees quickly learn which behaviors give the outcomes they want. They notice whether meaningful pay adjustments happen through strong performance, expanded responsibilities and career growth, or, only after someone threatens to leave.

Managers notice, too. If the easiest way to secure an increase is to declare a retention emergency, suddenly everything becomes a retention emergency.

Over time, an organization can unintentionally communicate that emergencies are rewarded and the loudest manager gets the largest share of the budget. I bet that isn’t stated in the compensation philosophy!

The Most Expensive Decision May Be the One You Avoid

Compensation strategy is often described in terms of what an organization will do:

• Where does the cooperative pay relative to the market?
• How does the cooperative reward performance?
• What roles or skills warrant a premium?
• How will salary and incentives work together?

Those questions matter. But a credible strategy must also define what the cooperative will not do.

Will you:

• Match every outside offer?
• Pay above the salary range to solve an immediate recruiting problem?
• Create a new title when the real issue is compensation?
• Approve an increase without considering employees in similar roles?
• Continue paying a market premium after the conditions that created it have changed?

These are harder questions because they force leaders to acknowledge tradeoffs. Saying ‘yes’ to one exception may create expectations, compression or equity concerns elsewhere. Saying ‘no’ may mean losing a candidate or employee.

There is rarely a consequence-free option. A strategy helps leaders choose the consequence they are most prepared to manage.

Pressure-Test the Strategy

A compensation philosophy should do more than sound good in a board packet or employee handbook. It should help leaders make difficult choices when money, talent and internal equity are pulling in different directions.

Take a look at the compensation exceptions made during the past year at your cooperative.

• What was approved?
• What was denied?
• Which managers received exceptions?
• Which employees knew to ask?
• What precedents were created?

Then compare those decisions with the organization’s stated compensation strategy. If the two tell the same story, the strategy is probably working. If they tell different stories, it may be time to decide which one employees and managers are expected to believe.