Compensation Philosophy Essentials in 5 Minutes
If you’re full of questions about compensation philosophy and compensation management programs, but starved for time, you’ve come to the right place.
We’ve answered some of the key questions that come up when businesses create a compensation philosophy for the first time – or when they want to make sure they haven’t missed any steps.
We’ve also included links to resources to dig into when you’re ready to learn more.
What’s a compensation philosophy? I don’t really have time to ponder abstract theories.
A compensation philosophy is more than food for thought. It’s a document that explains how your company will pay and reward its employees based on its values, market positioning, finances, and goals. And it’s the basis for your pay structures and overall compensation management program.
A compensation philosophy will help your organization explain – and your employees understand – all pay-related decisions across the employee lifecycle.
Why do I need a compensation philosophy?
Without a compensation philosophy, you’re navigating pay decisions around guesses, intuition, and what you think everyone else is doing. You’re likely inefficient, overspending in some areas, and underspending in others.
A strong compensation philosophy grounded in fresh, reputable data that’s relevant to your industry and stage of growth will help you:
- Effectively manage your burn rate
- Create pay packages that align with your finances
- Build transparency and trust around your pay practices
- Reach your diversity, equity, and inclusion goals with intention, instead of playing catch-up
- Create a more streamlined pay and reward process
I need to start a compensation philosophy from scratch. Where do I start?
Begin by analyzing the market with current data relevant to your company from a reputable source. In other words: Don’t Google your data set.
With this data, you’ll discover how the salaries you’re paying for certain roles compare to other companies in your industry with a similar stage of financing, also known as benchmarking.
Your compensation philosophy will explain how you’ll apply what you’ve learned from the market analysis and benchmarking to your business. It will answer questions like: Will you pay at or below market? What kind of performance or behavior will you reward?
How long should my compensation philosophy be?
The length and the details you include are up to your organization, but in general there are two ways to craft it.
1. You can also create a one or two-paragraph summary that's a high-level view of your strategy. Here's an example:
Equity is your most powerful compensation.
The problems we are trying to solve are complex, but if we solve them, the value will be enormous. Equity allows everyone on the team to share in this value, which is why we emphasize equity over cash.
2. You can also create a longer, more detailed view that includes specifics about your market positioning and the pay percentiles you’re targeting.
Once my compensation philosophy is written, what do I do with it?
A compensation philosophy statement can be shared for transparency with employees in places like your company’s intranet, FAQs, decks, and HR materials. And you can mention key points in your discussions with job candidates.
Longer, detailed compensation philosophies are best shared only with executives, human resources, and other compensation management decision-makers. That will keep you from being boxed into specific targets if your company changes in any way.
So once my compensation philosophy is written and shared, are we done?
Not necessarily. Your compensation philosophy might evolve as your company does. Re-evaluate it to determine if it still reflects the state of your organization whenever there are changes such as shifts to hybrid or remote work, transitions in executive leadership, or significant growth or expansion.