Creating a Compensation Policy and Philosophy

Q&A Session – The Essentials of Developing a Total Compensation Policy

The following is a transcript of the question and answer session that followed PayScale’s webinar, Developing Your Compensation Philosophy & Policy. The topics covered in these questions include vacation time, salary comparisons and sharing salary range information with employees. The main focus is developing a compensation plan philosophy and creating a compensation policy that’s competitive. Answers are provided by PayScale director of customer service and education, Stacey Carroll, MBA, SPHR.

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Q: What is your opinion about sharing salary range information with employees?

A: I absolutely believe in sharing salary ranges with employees. It’s just a fundamental part of who I am as an HR professional. I don’t support withholding that information. I’m a big proponent of communication, and I feel that if you feel the need to hide that then maybe you don’t feel very confident at how you arrived at those salary ranges. If you’ve arrived at them in a very systematic and objective policy procedure that you feel good about then I believe absolutely in sharing that information with employees and letting the employees know the amount of care the company takes to create fair and equitable salary ranges. I understand the complexity in communicating salary ranges to employees and if you’ve attended one of my other webinars you know that I say that I very rarely run across employees that think they make enough money and I hardly ever in my life run into employees that think they make too much. It’s a sensitive subject, I understand that, but I absolutely believe in sharing that information.

Q: When pricing jobs, an apple to apple salary comparison may not be accurate in terms of total compensation. Is the market evaluation mainly for base compensation? How much do you allow additional pieces to influence your compensation policy?

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A: Most of the organizations that we work with build salary ranges off of a base salary number. That’s very, very true. But, in terms of what your target is for that number, your target may be influenced by your total compensation program. I used to work in government and I will tell you that base salaries in government are not necessarily targeted at the 50th percentile, but as many people know, with a government job you get a certain amount of security and they happen to be very rich in benefits. So, the target for those jobs may be the 40th or even the 25th percentile. You consider that information to build salary ranges.

Now, that being said, some organizations do use a total cash compensation model. It gets a little more complex, though, when you start thinking about incentives, bonuses, and commissions because generally speaking, the more pay you’re going to put at risk for an individual, the more competitive you need to be. So, there are lots of things to consider, lots of complexities, but I absolutely agree with your opinion that you need to make an apples to apples comparison and it’s usually easiest to do so on a base salary amount. Although you can account for the fact that these other elements are more strongly influencing compensation at your organization by targeting a different percentile.

Q: It has not been mentioned, but do you include vacation as compensation?

A: Normally it’s a consideration, but it’s not usually viewed in a direct compensation type of way. It’s more often viewed as a benefit or fringe benefit. I will tell you from my own observations, when they talk about all of these generational differences and things like that, I’ve noticed in a lot of organizations that I’ve been a part of that vacation time is becoming more and more the element that folks are more interested in negotiating on. People are willing to take less money when the vacation time is right, and I think it comes back to the whole concept of a balanced work life. It’s certainly something that you have to consider just like every other element, but whether you’re going to actually be able to drill down to what’s the financial benefit of that, and how does it affect compensation, I think that’s going to be a little more difficult.

Q: If you’re just starting a compensation policy, what do you recommend doing first if you can’t do all of steps at the same time?

A: I recommend that a first step would be benchmarking your organization against external market data. The reason for that is that if you don’t yet know what your philosophy is and if you don’t yet know what your compensation policy’s going to be, at least seeing where you sit against the market can help to give you some insight into where you might sit as an organization. It also has the potential to identify some real tough hot spots where you may be behind the market a little bit and potentially you maybe have some high performers. That’s what I would recommend as a first step. Understanding that you’re probably going to have to do a lot of adjustment once you get to that point in developing both a compensation plan philosophy and a policy, that could be a really good initial read as to where you are as an organization.

Q: You mentioned applying a market premium to a higher priced job in the market. Can you explain how this concept can be applied?

A: In the IT manager job, you’ll notice that the salary midpoint was $80,000, but the market data showed $100,000. So in that particular example you have a difference of $20,000. With that $20,000, you can try and account for it with your internal range by just placing that person at the very, very top of the salary range. Or what you can do is place them at an appropriate salary, based on the salary range and then have a special market premium that is tied to the market data that gives them another $20,000 dollars in pay that’s really recognized as a market premium. The reason for this is, should the market go down then this premium would be taken away.

Many of you who work in manufacturing environments or unionized environments may have recognized this in terms of how unions like to use specific shift differentials or market premium rates where there’s a certain dollar amount that’s added to the base pay. As an organization, you can adopt this same philosophy. The whole concept is to help the employee understand the difference between the pay that’s based on the value of the job to the organization and how the market is driving the pay. And so, it allows you to reward for how the market is doing, but also to recognize that, should the market change, the market premium could be taken away. Although it’s never easy to take money away from an employee, it’s at least more understandable based on an objective set of criteria rather than just saying that you’ve decided to take it away with no explanation.

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