Compensation philosophy: 5 things you need to know

Get 5 strategies and a checklist to help ensure the compensation philosophy you’re creating supports your company’s growth.

Compensation Philosophy Best Practices and Checklist

When you’re writing a compensation philosophy, it’s easy to get lost in a spiral of numbers, goals, and what the other guys are doing.

After all, as the guide for your company’s entire compensation program, there’s a lot riding on a compensation philosophy.

If you’re unfamiliar with what a compensation philosophy is, it’s a formal document that explains how and why your company pays the way it does based on its values, goals, and financials. It allows everyone in your organization to explain and understand all pay-related decisions. 

In other words, a compensation philosophy is more than a checkbox on your way to designing a compensation program.

So, how do you know you’re on the right path to creating a compensation philosophy that’s right for your organization?

Here are 5 best practices to consider, plus a checklist that you can use to review your compensation philosophy when you’re done. 

Best practice 1: Start with fresh and relevant comp data

Your compensation philosophy clarifies your company’s market position and pay mix, which are informed by market analysis and benchmarking. 

We can’t stress enough how important it is to base your market analysis and benchmarking on reputable comp data. This means don’t Google averages, don’t trust manually-submitted salaries, and don’t rely on your peers’ opinions. 

Find a reputable source who can provide you with recent comp data that’s relevant to your industry, roles, and your company’s stage of growth. 

If you need more tips on market analysis and benchmarking, download our e-book, The High-Growth Guide to Compensation Benchmarking, or watch our on-demand webinar, What’s the Big Deal about Benchmarking for Pre-IPO Companies?

Best practice 2: Be clear and consistent

Your compensation philosophy should help you explain compensation policies throughout every stage of an employee life cycle. It should help you answer questions like:

• What’s the criteria for bonuses, promotions, or performance-related incentives?
• What happens if an employee moves to another region or state?
• Why are you paying above- or below- market for certain roles?

Aim for the ability to explain decisions clearly and easily – especially if they lead to a reduction in pay. 

A compensation philosophy gives transparency to your pay practices and helps build a healthy relationship between your company and your employees. 

Few things scale a rocketship faster than rockstar employees, and compensation plays big into how employees decide where to work. It’s not just about the value of the package; it’s about trusting that an employer compensates fairly. 

Best practice 3: Lead with comp data not feelings

Compensation can be confusing, stressful, and emotional because it’s tied to the health and quality of the lives of your employees and their families. 

Although you want to be empathetic, take a step back when you find yourself making decisions based on emotions. Gather comp data points and determine if they validate your feelings or if they reveal something else. 

Modern employers and employees recognize that there are too many factors in flux today to be anything other than scientific – especially with compensation.

Best practice 4: Beware of exceptions

Maybe there’s a case where you weren’t able to secure a candidate at a certain salary, so you assume all of your compensation packages aren’t competitive. That’s not necessarily true. Anything that’s related to compensation applies to 80-90% of your organization. The other 10% will be an exception, so make decisions with that framework in mind. 

Best practice 5. Reevaluate your compensation philosophy periodically

When there’s a major change or milestone in your organization, review your compensation philosophy to check if it still supports your business. These changes include transitions to hybrid or remote work, shifts in executive leadership, or opening your first office outside the United States.

You could also reevaluate it if you’re having trouble competing in the market or if you sense something about your compensation philosophy just isn’t right. No matter the reason, remember, comp data should support any changes you make. 

Compensation philosophy evaluation checklist 

Once you’ve written your market-based compensation philosophy, ask yourself the following questions to determine whether it’s ready to share or if there’s more information you need to gather:

▢ Does it reflect the values and mission of our company?

▢ Do the behaviors it rewards align with our company’s mission and values?

▢ How might it affect the company culture?

▢ Is every decision backed by fresh, reputable data?

▢ Does it align with our current financials as well as our goals?

▢ Does it cover how to structure new offers post-financing?

▢ Does it have a clear strategy for pay equity and diversity, equity and inclusion?

▢ Does it address how we handle hybrid or remote work?

▢ Can I use it to confidently answer common pay questions from employees and job candidates?