The Role of Compensation Policy in a Compensation Plan

When developing a compensation plan, your compensation philosophy is the compass to guide decision-making. Meanwhile, your overall compensation strategy establishes the programs to bring the plan to life. But those elements often need to be supported by specific policies that address day-to-day program administration. The following is the second in a three-part series on creating a compensation plan, focusing on the role that your employee compensation policy plays in your pay program administration.

Why Compensation Policy Matters

Communicating your organization’s compensation philosophy with employees helps them understand the “why” behind decisions that are made. In an employee’s day-to-day experience, though, policies have the most direct impact. Your organization may have a comprehensive general compensation policy, or a series of smaller, more discrete policies, such as a market compensation policy, an annual salary increase policy, an overtime compensation policy, or an incentive bonus policy.

Whether your policies focus around the frequency of salary reviews, employee travel, salary confidentiality or merit increases, your compensation policies are a tangible manifestation of philosophy and strategy. As such, they can greatly impact employee performance, satisfaction, and retention. And by providing pay program clarity for employees, these policies should help increase overall employee comp understanding, as well as engagement.

Compensation Policy Examples

There are numerous areas in compensation where it is beneficial to establish a formal policy governing program structure that defines how specific situations will be handled. These areas may include employee placement within base pay ranges, promotions, wage adjustments, comp time policy, annual reviews, or overtime policy.

To illustrate, one compensation policy example for employee placement within base pay ranges might address employees at the maximum of their range. The policy could read:

“Employees at the maximum of the range shall have their base pay frozen and are not eligible for an annual base wage increase until such time as their rate falls below the maximum of the range. Based on their level of performance, a lump-sum increase should be considered for employees at the top of their range.”

Documenting Compensation Policy

Compensation policy documentation can take many forms. In many cases, the support of managers and supervisors is needed to help carry out a policy, so you may need to pair policy communication with training for line managers. It is also good practice to include comp policies in your employee handbook.

For HR professionals, policy is often part of formal written compensation administration guidelines. You should document all compensation policies currently in place in your organization in one central location for easy reference. You also should outline the framework of your compensation policy, and keep compensation policy samples on hand for future use, should you decide to change your compensation policies in the future.

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