Formulating the Right Compensation Philosophy: A Guide

For companies, knowing when to pay their employees is one thing – but knowing HOW to properly pay them is a different factor altogether. Having a robust plan already in place can help companies create a better overall employee experience.

Thus, knowing how to create the right compensation philosophy is the secret for companies to unlock new possibilities with their workforce that they might not have tapped into yet while rewarding employees that are

Continue reading to learn more about compensation philosophy, the positive benefits that it can bring to your company and how Salary.com can directly help companies come up with a compensation philosophy that works.

What is compensation philosophy? 

Compensation philosophy is a document that HR professionals use to dictate what and how an organization should pay its employees. Think of it as a way for companies to identify which compensation practice will work to ensure that every employee within the company receives the right compensation for their specific job title.

Having the right compensation allows companies to align their current compensation process with their company’s needs. This then opens them up to creating more productive employees moving forward, which can help create a more competitive workforce moving forward and ensure employee satisfaction.

Though it’s a relatively complex process, Salary.com’s compensation planning software can help companies go through its initial complexities as well as provide them with the insight that they need to set their employees’ compensation competitively.

How can Salary.com help choose a company’s compensation philosophy?

Speaking of Salary.com, most companies can benefit from their help as they have plenty of tools that can directly provide companies with the tools that they need to come up with a strategic compensation decision for their pay practices.

Tools like the aforementioned compensation planning software and their patented CompAnalyst can provide companies with the right tools that they need to come up with a robust compensation structure to pay their employees competitively.

Salary.com’s reliable softwarea provides companies with a more comfortable way to come up with their own compensation strategy and ensure that everyone within the company gets paid competitively and fairly, which can help motivate employees and boost company performance moving forward.

Examples of compensation philosophies

Listed below are some real-life examples of compensation philosophies for some companies that should take note of.

• Basecamp

  Basecamp has a consistent pay philosophy since they pay everyone within the same pay grade the salary range, with raises only coming in once a year. These raises are then based on the 90th percentile of San Francisco’s market rate regardless of where they’re based, essentially guaranteeing that every employee is paid within the top 10% of their current position.

• AbbVie

  Although AbbVie pays their employees the base salary of the employee's position, their compensation strategy makes up for it by providing them with more competitive bonus packages. The company provides both short- and long-term incentives on top of providing them with extensive health insurance, retirement plans, and work-life balance options like a hybrid work setup.

• NVIDIA

  NVIDIA’s approach to compensation plans is to provide their employees with comprehensive health plans that include paid time-off for family time and familial support that’s specifically designed to help them in any stage of their lives which promote employee satisfaction, which correlates with their company culture.

• Hubspot

  Hubspot’s main compensation philosophy is centered around transparency and overall flexibility. Their main compensation band is anchored within one major city for every country they have employees in. This ensures that employees will still receive more than ample pay even if they’re relocated to a different part of the country.

• DHL

  DHL takes a more creative approach when it comes to their compensation strategy as they directly integrate employee performance into their compensation metrics. This then creates a more engaging working environment for employees.

How can compensation philosophy help a company’s compensation practice?

A clear compensation philosophy provides companies with a clear picture of how their employees are paid, essentially guaranteeing that employees see better pay equity and provide them with more competitive pay, essentially securing the company's internal equity moving forward.

The right philosophy also allows companies to come up with more unique compensation practices that’s specifically designed to help them reach their goals as well, essentially killing two birds with one stone.

How to create your own compensation philosophy

Listed below are the steps that companies can take if they want to create their own formal compensation philosophy from scratch.

Step 1: Consider several key factors

Much like everything else in the business world, there are several key factors that should be considered before creating your organization's compensation philosophy.

• Market data: Acquiring market salary data and knowing how much each company that focuses on the same niche as yours can help you know the competitive in the market for a certain job description.

• Current financial resources: Next, companies should identify their current financial resources and check whether they have the ability to follow their chosen philosophy or not.

• The company’s pre-existing philosophy: Lastly, companies should review their documented compensation philosophy and look for its strengths and weaknesses. This then gives them two options: one, start over from scratch, and create an entirely new philosophy. Two, repurpose your philosophy to cover its strengths and weaknesses.

Step 2: Tailor the philosophy to the company’s needs and goals

The next step is to properly tailor the compensation package to the company’s needs and goals. This step is where good compensation planning software comes into action.

A reliable solution like Salary.com’s Compensation Planning Software can help companies perfect their compensation plans and craft a well-defined compensation philosophy that works specifically for your company. It can even help companies come up with competitive bonus packages that can set you aside for your competitors, too.

Step 3: Create a proper structure

After considering the needs of the company, the next step is to create an effective compensation philosophy that benefits both you, the company, your employees, and the business' objectives. There are plenty of ways to do this, but the example below contains the elements of a philosophy that work.

• Create a robust statement that sums up the philosophy

• Fully commit to pay equity

• Emphasize on base pay

• Offer variable pay options if necessary

• Create a salary structure

Step 4: Check for legal compliance

The compensation policy should be perfectly legal within the state labor laws to ensure that you will not be paying any additional fees. The structure should be in compliance with the FLSA, Equal Pay Act, and everything else.

Step 5: Implement and adapt

The last step is to implement the philosophy into action and see the positives and negatives that it can bring to your company. For this step, it’s important to properly adapt and change it according to the business’ overall needs to ensure a transparent compensation philosophy while still adhering to the company's mission.

It's important to consider that the main point of creating a compensation philosophy is to help align the company's values, business strategies, and overall company performance with their competitive compensation programs. Salary.com's Compensation Planning Software can help provide companies with a good picture of what their current philosophy either lacks or needs to remain competitive in today's modern business world while still retaining employees and attracting top talent.