What Is a compensation philosophy?
A compensation philosophy is simply a formal statement documenting the company's position about employee compensation. It explains the "why" behind employee pay and creates a framework for consistency. Employers use their compensation philosophy to attract, retain, and motivate employees as part of their overall compensation strategy.
The human resources department typically develops a compensation philosophy in collaboration with the executive team. The philosophy is based on many factors, including:
- The company's financial position.
- The size of the organization.
- The industry.
- The company's business objectives.
- Market salary information.
- The level of difficulty in finding qualified talent.
- Unique circumstances of the business.
The compensation philosophy should be reviewed periodically and updated based on current factors affecting the business. For example, market conditions may make it difficult to find qualified talent in a particular specialization, and an employer may need to pay a premium for these candidates. If the employer's current compensation philosophy does not account for this increased value, then the organization may need to change its philosophy to meet its current needs.
What should be included?
A well-designed compensation philosophy supports the organization's strategic plan and initiatives, business goals, competitive outlook, operating objectives, and total rewards strategies.
Most compensation philosophies seek to:
- Identify the organization's pay programs and total reward strategies.
- Identify how the pay programs and strategies support the organization's business strategy, competitive outlook, operating objectives and human capital needs.
- Attract people to join the organization.
- Motivate employees to perform at the best of their competencies, abilities and skill sets.
- Retain key talent and reward high-performing employees.
- Define the competitive market position of the organization in relation to base pay, variable compensation and benefits opportunities.
- Define how the organization plans to pay and reward competitively, based on business conditions, competition and ability to pay.
- Ensure equal pay for equal work, with allowable pay differences based on factors not prohibited by law.
An effective compensation philosophy should be able to pass this test:
- Is the overall program equitable?
- Is the overall program defensible and perceived by employees as fair?
- Is the overall program fiscally sensitive?
- Are the programs included in the compensation philosophy and policy legally compliant?
- Can the organization effectively communicate the philosophy, policy, and overall programs to employees?
- Are the programs the organization offers fair, competitive, and in line with the compensation philosophy and policies?
While HR is clearly in the lead in developing an organization's compensation philosophy and policy, success lies in collaboration with the leadership team to obtain valuable input, direction, and buy-in.
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