Crafting a Compensation Philosophy – a Step-By-Step Guide

Written by Salary.com Staff
March 2, 2023
Crafting a Compensation Philosophy – a Step-By-Step Guide

When creating a compensation philosophy, you need to determine the value of each job in your organization. For most organizations, each role has different levels of importance while still being critical to the overall success of the organization. As this is the case, it can be a challenge to gauge the right balance between job value and compensation.

In this article, we will guide you through the step-by-step process of crafting a compensation philosophy. This philosophy will need to meet the needs of both your organization and its employees, while also taking into account the ‘value’ of each job. Let’s begin by diving into the first step of the process.

Are you Paying Fairly and Equally?

Specify Your Organization’s Goals & Objectives

Before you determine the relative value of each job in your organization, you need to assess your organization’s overall goals and objectives. When evaluating your organization’s goals and objectives, you should seek how it links to your compensation philosophy. By linking these together, you can ensure that each employee is appropriately valued for their role.

The organization’s goals and objectives should be specific, measurable, attainable, realistic, and timely (or SMART). An example of one goal might be “increase revenue by 15% by the end of the year.” Once this goal is set, you can break it down into smaller steps to help you achieve the overall greater goal.

Determine Job Performance Criteria and Job Values

After you determine the organization’s goals and objectives you need to assess which jobs exist in your organization. Once you have a list of all the jobs in your organization, you can start to determine the value of each job. To do this, you will need a deep understanding of the essential skills and job performance criteria for each role. As well as this, you must assess the relative importance of each role to your organization.

Here are some steps you can consider:

  • Create an inventory and classify all the positions in your organization (e.g., manager, executive).
  • Identify the key performance criteria and the outcomes that exist with each job.
  • Assess how much value the job brings to the organization by assigning specific weightings to each element of the role.
  • Develop a compensation philosophy that outlines how to calculate pay rates for each position. You will need to take into account different factors such as the cost of living and market demand.
  • Keep up-to-date with industry trends by regularly reviewing and adjusting when necessary.

If effective, you can use these steps to develop a compensation philosophy. Remember to be fair and equitable while also staying competitive with your salary rates. If you are struggling to assign a monetary value to every job role in your organization, consider looking at external market data.

Use Market Data to Dictate Your Compensation Strategy

Another great way to find out the value of each job is by using the current market data that exists. The Bureau of Labor Statistics is one reliable resource you can use, and it can provide you with a number of statistics. This includes information about the salaries and benefits that other organizations in your industry and area are offering.

Compare your compensation practices with the data you find. From this, you should be able to gain a good idea of what each role should be valued as. When evaluating this, you can also consider any additional compensation that is beyond just base pay. This includes bonuses, stock options, or other perks.

Decide Which Benefits You Will Offer

We’ve just mentioned a couple of benefits, but there are plenty more you can offer. Employees will value both monetary and non-monetary benefits. As this is the case, you need to think carefully about which is best for your organization and for each employee. Here are a few benefits you can offer:

  • Health insurance

Health insurance is a must-have for all organizations and the compensation packages they offer. It covers an employee’s medical expenses but it also shows that you value and care for your employees. Consider offering options such as HMOs and PPOs, as well as vision and dental coverage.

  • Retirement plans

Another benefit to consider is offering retirement plans.  These plans provide incentives for long-term employees, as well as for attracting new talent. Think about setting up a 401K plan or a 403B for employees that are eligible.

  • Vacation time

Vacation time helps provide your employees with a healthy work-life balance. It is an attractive benefit as everyone needs their downtime. Consider offering vacation days and paid time off that employees can use at their own discretion throughout the year.

Conclusion

To further determine the value of each job in your organization, you can consider creating compensation bands for each position. As with other steps, you will need to value the complexity of the job by comparing factors such as skills required and job difficulty. Doing this effectively can help create fairness and consistency in your compensation philosophy.

Crafting a compensation philosophy isn’t just a one-time event. You need to regularly review and revise as the market and your organization evolve. Consistently review your organization’s needs, external factors, and how the value of a job in your organization can change.

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