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Understanding Your Business Strategy Through a Compensation Philosophy

Written by Salary.com Staff

March 2, 2023

Understanding Your Business Strategy Through a Compensation Philosophy

The success or failure of your organization and business strategy will often rest on how you set up and measure your compensation philosophy. Having a comprehensive compensation philosophy is essential for aligning your goals and strategy with the most effective ways to attract, motivate, and retain the talent you desire. Creating a comprehensive compensation philosophy can be complex, however.

In this article, we will answer the question: What is your overall compensation philosophy and how does it align with your business goals and strategy? There are many factors to consider when answering this question and selecting an effective plan. With that being said, let’s dive into the article.

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Define Your Organization Goals and Strategy

You need to understand how your compensation philosophy aligns with your organization’s goals and strategy to figure out which direction your organization is going in. You can make informed decisions about the benefits of your employees once you know this. As well as this, you can begin to develop and plan a compensation strategy for the future.

Ask yourself questions to define your organization’s goals and strategy. Do you want to be a sustainable and eco-friendly provider of goods and services? Or would you rather be a low-cost provider of a product, regardless of the environmental cost? These are just examples, but by establishing what your direction is you can then begin to develop your compensation philosophy and program.

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Establish Benchmarks for Compensation

Once you define your goals and strategy, your next step is to establish pay benchmarks for specific roles in your organization. Doing this ensures that employees receive competitive wages for the work they complete. If done successfully, this will help retain current employees while attracting new ones.

To set benchmarks, your organization will need to be in line with market standards. To find out these market standards, you can:

  • Collect data on external salary trends
  • Use comparable skill sets to identify and organize role classification
  • Identify the necessary qualifications & responsibilities for each role by conducting a job analysis
  • Research the relationship between job roles and how they differ from each other in terms of compensation.

If you can fully understand all of these elements, you can apply what you know to your compensation philosophy. Be comprehensive in how you structure your compensation system to ensure it is fair and competitive against market rates. Doing this breeds transparency and trust as employees, present and future, can have clear expectations.

Understand Job Descriptions, Roles, and Responsibilities

When developing your compensation in relation to your business strategy, you need to fully understand how your job descriptions, roles, and responsibilities affect pay. Pay depends on a number of factors for each employee. This includes:

  • How much they contribute to your organization reaching its goals
  • The individual’s unique set of skills and experience
  • If the position requires certain technical skills
  • The value an employee brings to your organization
  • How the role compares to others in the organization
  • The cost of living in the location
  • The workload the role has
  • Any incentives or bonuses that are being offered

Understanding these elements can help point you in the right direction regarding how you should compensate your employees. Different roles require different needs. Reflect this in your compensation philosophy while remaining fair and competitive.

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Align Your Compensation Philosophy with Performance Metrics

To answer the question of what your overall compensation philosophy is, you need to establish performance metrics that your pay structure will be based on. These metrics need to be clear and measurable to judge performance. They can include individual goals, team goals, project results, or even qualitative goals like cultural fit or leadership.

Once you determine these metrics, you need to decide how to reward performance. You could offer bonuses, pay rises, or any other performance incentive. Keep in mind that not all compensation needs to be money, as many employees will find something like extra vacation days as an attractive reward too.

Having Equity and Fairness in Compensation Practices

Every worker in your organization will benefit by having equity and fairness in the organization’s compensation philosophy. Pay practices shouldn’t be biased against anyone, no matter their race, gender, or age. As this is the case, performance should be rewarded based on merit and in an unbiased way.

While you can make some compensation packages personal, ensure you keep a consistent approach for all employees. Workers want to feel valued, so you should reward them when they perform successfully. If you are struggling, ask for feedback from employees to find out what they really value in their compensation.

Analyze and Evaluate Your Compensation Philosophy

The basics of a compensation philosophy have now been covered. It is vital now to review this philosophy in relation to your overall business strategy, goals, and values. Take some time to evaluate what is working and what isn’t. If effective, you will have a compensation philosophy that encourages success while still being aligned with your business strategy.

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