Editor’s note: This piece was updated in August 2018 with more recent information.
In 2018, a compensation philosophy should be considered one of the most important statements you develop as a company. At a time when employees have many options as to where they commit their talent, it’s critical that you are intentional in how you handle offers, promotions/raises, bonuses, equity and benefits. Your choices will impact how employees feel about your workplace and contribute to employee satisfaction.
What is a Compensation Philosophy?
A compensation philosophy provides the overall direction for how you make compensation choices. It is based on a set of principles and values you care about as a business, and it acts as a blueprint for prioritizing your comp spend. Your compensation philosophy should reflect the values you’ve identified in your mission statement. A compensation philosophy is important, as it sets the backbone for how you will pay employees, affecting their future earnings potential, and more. So, make sure that key execs as well as employees from across the departments are involved in this process.
Some important questions to answer in your compensation philosophy include:
1. What are your goals as a company?
For example, how fast do you want to grow and what key activities do you need to implement to get there?
2. In order to achieve these goals, what behaviors do and work culture do you want to drive / reward?
For example, if one of your core company values is experimentation or innovation, you may want to give out team-based bonuses when a team hits a stretch goal, rather than individual bonuses (which may discourage risk-taking).
3. Do you want to lead, match, or lag behind others in your industry and market?
Consider the state of your business, location, industry, and level of competition you’re facing for talent. There isn’t a better or worse position to take, but the key is anticipate how your choice will impact your ability to attract talent and the employee experience.
For example, if you choose to match or lag behind others in terms of cash compensation, do you have superior equity pay, benefits, perks or career development opportunities you can use to offset the lower pay?
It’s helpful to think of pay as a total package, and decide how you can mix and match different elements to create a compelling employee experience. For example, if you’ve decided not to lead the market in base pay, you may choose to offset it by giving employees greater flexibility, work-life balance and/or unique career opportunities.
4. How will you demonstrate fair, equitable and competitive pay practices?
These days, employees can easily look up salary information online. If you don’t proactively communicate your commitment to fair pay, workers are likely to believe that they’re underpaid.
PayScale’s latest Compensation Best Practices Report found that only one in five employees feel that they’re fairly paid. An earlier study we conducted found that less than half of all employees feel valued at work.
You want to select some clear benchmarks to ensure you’re paying fairly and consistently to the market. For example, you might decide to do a market study every year before an annual increase cycle, and decide that if the market has moved up by a certain percentage for a role, you will automatically review and adjust salary for that role.
In addition, you’ll want to decide what specific factors you want to reward, whether it’s proficiency, acquiring new skills, performance, tenure or a combination of these elements. By making these decisions, you show your employees what they need to do in order to achieve more and earn more.
One important note: make sure you answer these questions in a way that considers every person in the organization. While individuals’ compensation packages will be different, the compensation philosophy will help you ensure that everyone’s compensation packages are derived from the same set of core values and criteria.
WHAT SHOULD BE INCLUDED IN A COMPENSATION PHILOSOPHY?
Every company’s compensation philosophy varies on their mission statement, company values, industry, and many other factors, but consider including these elements to your compensation philosophy:
- Plan for rewarding growth and success: Set a guideline for how your company plans to reward its employees for meeting their goals, developing their professional skills, and being an exemplary employee.
- Determinants of pay, promotions, and equity distribution: How does your company determine employee salary? What factors do you consider when setting competitive salaries? What is your position on distributing equity to your employees? These are some questions to consider when discussing compensation.
- Breakdown of compensation: Outline non-monetary compensation benefits which make up an employee’s compensation package. This includes health insurance, retirement plan contributions, Paid Time Off, and many other benefits.
You now know what a compensation policy is, the benefits of creating one for your company, and elements to include. The next step is putting it together and learning how to write a compensation philosophy.
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. To write a compelling compensation philosophy statement, make sure it includes these elements:
- Discusses the core values and principles your company uses to make decisions.
- Covers about the unique value you provide as an employer
Don’t get too specific about the mechanics. 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.”
Example: PayScale’s Compensation Philosophy
We believe it’s important to TALK about pay. PayScale is the leading compensation solution provider in the world, and we think that our own values need to be reflected in how we act.
Being as transparent as we can be and sharing both our intent and our practices about pay is part of this. We also believe that you should be part of that conversation. We also want to arm our people managers with the right tools and information to be good at having these conversations with each of you.
We believe in the MARKET in determining what to pay.
The market is a combination of things. It’s where we’re located. It’s our technology industry. It’s the size of our business, and our status as a private equity-backed company. We understand that you have choices about where you choose to give your best efforts, and we strive to compensate you in ways that make you continue to choose PayScale.
RESULTS matter and are the most important part of how we allocate future rewards. We all succeed when PayScale succeeds. So we want you to focus on not just how to be busy, but how you can have an impact.
We believe in Work/life BALANCE. We really do.
Let’s be honest. This is sometimes code for not giving your best. We don’t want it to mean that. We truly believe that in order for you to bring your best to PayScale and to drive the best results, it is important for you to take care of you, and to enjoy life, your family, and outside interests. These are two sides to the same coin. We think that this makes us unique in the world of high tech, and we don’t make this part of our philosophy lightly. We think that this investment in your wellbeing is also the smart choice for the long term success of the business.
Pay is a PACKAGE.
Your compensation is a total rewards package. It’s also a mix. It is the experience you have of working at PayScale, it is your salary, and it is your bonus compensation if you’re eligible. It might be an occasional movie day or free lunch. It is healthcare insurance, and flexible spending accounts. We know that the dollars matter, but we also know that it’s never just about the dollars, so when we put pen to paper on this comp philosophy, we thought it was important to reiterate that and to also say that we don’t just think of you as your salary, we think of you as people with gifts to offer and we’re happy that you choose to share them with us in return for some money—and other stuff. We want you to like your deal, and we want you to think it’s a fair deal. This is how we start.
USE YOUR PHILOSOPHY TO DEVELOP A COMPENSATION POLICY
Once you have your compensation philosophy, you are ready to develop a compensation policy. A compensation policy provides the framework for carrying out your compensation program. It elaborates on the high-level items covered in your compensation philosophy.
For example, you’ll want to define the market you will use for external market comparison or your “competitive set”. You will come up with a process to determine internal equity. You’ll define how you plan to use different types compensation, including base pay, bonus or variable pay, commissions, equity, profit-sharing, etc. Additionally, you can create salary ranges by profession to make compensation even more equitable. Last but not least, you’ll want to delineate compensation management responsibilities.
Don’t rush this as process. 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. For further reading on how to develop a compensation policy, check out these resources:
- Establish competitive pay rates
- Become a top-performing company
- Manage pay for virtual workers
- Explore modern pay for performance