Building a compensation philosophy

Compensation Philosophy
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Time to write or update your compensation philosophy?

A compensation philosophy drives companies to create explainable, cohesive and consistent compensation practices that helps attract and retain employees. It is at the core of a strong compensation program.

In this article, we will review the different steps to build a compensation philosophy that makes sense for your typology of company.

What is a compensation philosophy?

A compensation philosophy indicates the method and reasoning a company uses to make compensation decisions. This can be unified in a document that is shareable based on your company’s culture and values. Most of the time, the leadership team alongside the rewards/HR team are involved in developing this structure.

Developing this helps your company clarify the reasoning behind compensation, benefits, increase guidance and creates a base structure to ensure consistency across departments.

Providing explainable policies is a good way for employees to understand the rationale behind their own compensation decisions, and even if they might not agree to it, they are not left in the dark.

The importance of a compensation philosophy

With a structured compensation philosophy, it allows your company to achieve several key strategic points:

  • Setting the right expectations when it comes to compensation
  • Simplifying structured compensation decisions
  • Safeguarding explainable and equitable pay practices
  • Building consistent foundations within the company as teams grow
  • Reinforce your employer brand and employee experience

Rewarding employees for their efforts, preparing managers on compensation discussions and employees understanding how they will be compensated are key to promote clear sharable decisions.

Formatting your philosophy

Although there is no right or wrong format as this really depends on the company’s culture, you can find two standard ways to structure your compensation philosophy:

Statement and principles

This is a summary of the key principles that encompasses your compensation philosophy and that are easily shareable across your organization. Make sure it is also aligned with your culture.

Below an example of GitLab’s principles:

We're an open organization, and we want to be as transparent as possible about our compensation principles. Our compensation model is open to data driven iterations. […] Compensation aims to be at a competitive rate for your job family, your location, your level, your experience, and your contract type. […] We do not disclose individual compensation since compensation is not public.

Another example from Delta Airlines focused on performance-based pay:

Our overarching compensation philosophy is to provide industry-leading total compensation for industry-leading performance across all workgroups.
Pay for performance is the foundation of our compensation philosophy for all employees, driving a strong sense of team work and continual improvement of business results.

Keeping these statements short allows to provide a first high-level vision that managers and employees can own, while keeping more detailed information available to people that want or need more precision.

Complete Handbook

Your principles are an extract of a more complete, unified document that explains in details your market position, pay mix, strategies and processes during increases and outside cycles.

Again, GitLab’s Total Rewards handbook provides detailed paragraphs to explain their market-based approach, the internal organization that deals with compensation approvals, rules and criteria regarding compensation items and extensive documentation on their increase compensation cycles.

And for people that would like to know more, they also have specific FAQs for each compensation topic or question.

Main topics to include in your philosophy

Below are examples of several key topics that can be mentioned in your company’s compensation program:

  • What are the core principles of your compensation philosophy? These should be aligned with your statement and communicate your compensation targets (internal equity, market-based approach, rewarding performance, etc.)
  • What your target market will be and in which market position would you like your compensation to aim for (regarding salary, total package or equity).
  • How are your compensation ranges established (methodology, peer groups, comparables) and how do you refresh them?
  • How do you assess candidate or employee’s compensation and what rules/criteria determine compensation decisions (tenure, job level, location, etc.).
  • How do you execute your compensation review cycles (frequency, rules, eligiblity, recommendations, etc.) and who is involved?
  • How do you consider a promotion within the company and how is it linked to compensation?
  • How do you calculate and execute variable rounds (bonus or other payout compensation)?
  • What about benefits and other items linked to your total rewards strategy?

Be sure to include how these compensation practices are linked to your culture, your values and add specific company context when relevant to emphasize your points.

Sharing your compensation philosophy

Communicating your compensation philosophy is a key step to ensure consistent execution of the principles described and provide strong rationale regarding compensation decisions.

As there are different levels of pay transparency, you can decide the right level of sharing based on your company context and decide of the level of detail you want to go into. For companies that may be changing their strategy more frequently than others, better begin sharing internally the compensation statement and slowly go towards your more complete handbook or FAQs at next stages of the company.

Communication can be done through your company’s intranet or you can also adopt a total rewards statement in a compensation platform where your policy is easily centralized and accessible based on your rules.

A clear communication of your compensation philosophy ensures everyone understands the values that guide your company’s compensation decisions and expectations can be managed accordingly.

Evolving your compensation philosophy with your company

Creating a compensation philosophy that is aligned with leadership, shared with managers and employees, and understood is a great step to achieve your objectives. However, this document is not static and should live alongside your company’s challenges and new missions. It’s always good to review this document as the company changes as it should reflect your current stage.

A strong compensation philosophy is a key component of any retention strategy. It helps attract and retain your future talents and structure cohesive compensation decisions for the future. By considering your own context, you can develop a compensation strategy that sets the right foundations.