According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months—a whopping 80% crash and burn. Reasons for this high percentage include companies not knowing their customers well enough, products that aren’t compelling or differentiated, and many other distractions that occur throughout the process of getting the company up and running. The initial steps of starting a business are intricate, and must be approached with careful attention and precision. Establishing the role and procedures of Human Resources is one of these essential, yet often underestimated or entirely disregarded, initial tasks. Here’s how it frequently plays out:
HR typically begins as an ancillary part of someone’s job. If the business experiences growth and success, it’s natural for someone to begin thinking about people strategy. Lawyers may be consulted and will likely recognize some risk and liability looming on the horizon. Soon it becomes necessary for an HR function to be birthed.
As an HR role in a new company begins, it typically encompasses only those functions that are seen as essential and critical to the company. Perhaps its focus might initially be merely concerned with finding qualified people for jobs, hiring them, and paying and managing their data. Benefits, compliance, and other policies may be incorporated eventually. Compensation may be determined simply by who negotiates most effectively instead of in accordance with current market rates and the company’s values.
As more people are hired, another phenomenon often occurs: labor costs grow. If those costs weren’t already a company’s biggest overhead, they most certainly will be before long. Eyes turn to the head of HR to see if they can magically come up with a way to determine pay that relates with the company’s way of thinking – typically a combination of philosophy, strategy, or principles. Several different kinds of pay will likely emerge, including premiums for shifts, skills, sales incentives, and equity. It becomes complex when companies must begin to set down guidelines for why they pay the way they do—how can they align compensation and rewards with their values and make decisions going forward according to these principles? This question and the other kinds of issues that surface when it comes to compensation typically require some discussion and/or debate amongst the leadership so that they can be transitioned from historically operational and tactical strategies to something more strategic and principled. Done incorrectly, compensation can make a company’s biggest asset—employees—frustrated and discouraged. Done the right way, employees will be satisfied and engaged.
So, where to start? Frequently the path has already been worn, and it may just be a matter of establishing and formalizing the philosophy that is already engrained in a business. More than one company has gone through this process of reviewing prior decisions and extracting their approaches and philosophies from what they have found. The compensation philosophy is an overarching statement from which specific strategies, principles and objectives can be derived and applied to specific types of compensation. Example application scenarios include determining the level of transparency a company will have with employees when it comes to explaining what is behind the decision about their base pay, deciding whether to share pay ranges, and pay ranges for jobs an employee aspires to, with all employees, and how to reward performance at the individual, team, and/or company level. In making these decisions of how to spend limited dollars, having stated principles easily leads a company to make a specific choice over another.
What does principled mean? Honorable, upright, ethical, righteous, just, moral—these are all synonyms for principled. Ideally the same word can be used for any other function in HR! But in the case of compensation, it also means being confident in what the path looks like after taking the time to explore it, consider alternatives, and make a decision on a future with a specific plan. From the moment a decision is made to put a compensation plan into practice, future actions and decisions can always be bounced off a company’s philosophy and principles to determine the best course of action.
Jim Harvey is Founder and Principal Consultant for Columbia Compensation Consulting LLC. He specializes in leading companies in the formulation and execution of their rewards strategies in support of business objectives. Jim began his professional career in Arizona, and moved with his family to Oregon in 1997. He has been an instructor for WorldatWork since 1990, teaching classes on job evaluation, base pay / pay for performance and sales compensation. He enjoys Oregon’s long summer days, gardening, recreational golfing and travel. Find out more at www.columbiacomp.com.
A Principled Approach to Compensation
