Developing a Compensation Philosophy

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Once you’re done sorting out a new hire’s training schedule or making sure current employees understand their medical benefits, it’s important to set aside time to review your company’s compensation philosophy. This philosophy will then inform your compensation policy. And, that policy acts as the foundation of smart compensation program.

How do you get started in this HR process and what is the difference between a compensation philosophy and a compensation policy?

Developing a Compensation Philosophy

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A compensation philosophy provides overall direction for you intend to spend your compensation dollars. It answers how you will prioritize your comp spend, what matters most, and how your compensation plan supports your organizational values. Your compensation philosophy lays out the guiding principles for your compensation plan. It serves as a mission statement for your plan. Some important questions to ask as you develop it include:

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  • How does our current compensation strategy support the goals of our organization?
  • Where do we sit regarding compensation in our industry and market?
  • Do we demonstrate fair, equitable, and competitive pay practices?
  • How do each employee’s talents link to the organizations goals?

These questions should be answered in a way that considers every person in the organization, from the janitor to the CEO. While employees’ compensation packages may look completely different, the compensation philosophy makes sure that the compensation packages are derived from the same set of core values.

How to Write a Compensation Philosophy

Once you’ve reviewed your company’s mission statement, founding principles and goals for the future, it’s time to start writing. The following are tips for creating a lasting compensation philosophy:

  • Be as concise as possible. Your philosophy should be about two paragraphs in length.
  • Maintain an optimistic yet realistic tone.
  • Keep in mind that the organization has and will go through changes. Policy can change, but your compensation philosophy should weather these changes with few adjustments.
  • Ensure that your philosophy reflects some of the values already listed in your company’s mission statement.
  • Avoid specific details in your compensation philosophy. Instead, consider using general language such as “attractive, flexible, and market based pay”, “competitive in recruiting and retaining employees through high-quality compensation plans”, or “compensation program aligned with shareholder interest.”

Use Your Philosophy to Develop a Compensation Policy

Once you have your philosophy prepped, you are ready to continue in the process by developing a compensation policy. Complete the full process of developing your philosophy before you try to start any major benchmarking or market study project. Having a solid compensation philosophy and strategy is the beginning of a well-constructed, defensible compensation plan. As a matter of fact, if you find the organization has to defend against a claim of pay discrimination, your defense attorney will ask first if you have a compensation policy.

The compensation policy provides the frame work for your compensation program. Here are some tips for developing your policy:

  • Keep your compensation policy in the format in which your other policies are written. This way it is consistent with other company policies.
  • Include language reflecting the company’s intent to create equitable and fair pay practices free from discrimination.
  • Before a legal review, you may want to consider asking key stakeholders and the board to review your policy’s language.
  • Request sign off on the policy by an executive such as the CEO or president.

Your compensation policies should include:

  • Defining the market you will use for external market comparison or your “competitive set”
  • A definition of the process used to determine internal equity (job evaluation)
  • The different types or elements of compensation
  • Clearly defined compensation management responsibilities

Be Specific and Stay Up to Date

As you go through this process, remember that compensation is not created equally amongst organizations. One organization’s values may differ from another or their compensation strategy may be completely different. A manufacturer may have many employees primarily paid with base pay as opposed to a car dealership which may have mostly commission employees. Both organizations’ compensation philosophies and policy statements will likely be different, but one thing that these two organizations will have in common is that their compensation policies are up-to-date and written down.  That’s where you want to be.

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