Creating a Compensation Philosophy

People are your organization’s greatest asset, contributing every day to its success. Making smart decisions about how you reward your people for their contributions is a critical component of ensuring this success.

In best-in-class organizations, these decisions – and your overall pay strategy – are driven by a formal compensation philosophy. Yet in Salary.com’s 2018 Pay Practices and Compensation Strategy Survey, more than 30% of participating organizations reported that they don’t currently have a compensation philosophy in place.

A strong compensation philosophy statement can help you make pay decisions that are more aligned with your organization’s goals. Since your pay philosophy statement documents the “why” behind your pay decisions, it is an important building block for any compensation program. Your compensation philosophy can help ensure consistency in your pay decisions, helping managers, executives, and HR stakeholders align pay with business objectives.

Compensation Philosophy Examples

If your organization has yet to document a formal compensation philosophy, reviewing sample compensation philosophies from other organizations can help you brainstorm ideas.

When looking at example compensation philosophy statements, there are several factors to consider. Your philosophy should reflect your individual organization’s culture, goals, and mission, so the elements in one company’s philosophy may not translate well to another. You may also have different work behaviors that you want to reward, or have a different market position that you want to target to stay competitive.

How Does the Market Influence Compensation Philosophy?

A strong compensation philosophy drives consistency. However, there are times the market will influence compensation philosophy. Especially in today’s tight labor market, your pay philosophy may need to be updated to ensure your organization stays competitive.

For example, competitive industry conditions may mean that you’re struggling to recruit top talent with the critical skills you need to achieve your business goals. These skills shortages may force you to adjust your compensation philosophy – either for all employees or for specific groups of employees.

If your organization’s priorities or business model change, your compensation philosophy may also need an update. Similarly, if the external market conditions in your industry or local pay markets changes, so too should your pay philosophy.

Types of Compensation Philosophy

A well-written compensation philosophy is tailored to your specific organization’s goals and mission, so there is no particular formula or type to follow. While sample compensation philosophies can give a good starting place, you will need to make sure that your pay philosophy statement reflects your particular business conditions. You should plan address the following key elements in your compensation philosophy:

• How your organization’s total rewards programs support business goals and objectives
• What market position you aim to occupy in comparison with the competition
• How your company’s compensation philosophy aligns with your culture and core values
• The unique value proposition you can provides as an employer

What is a Compensation Strategy?

The natural extension of your compensation philosophy is your compensation strategy. While the philosophy documents the “why” behind how your organization’s approach to compensation, the strategy is how you bring your philosophy to life. Your organization’s strategy may include tactics, programs, tools, and communications that can shift over time, even if your philosophy does not.