Tips for Developing a Powerful Compensation Philosophy

Compensation collage illustration

A compensation philosophy aims to ensure pay is market-competitive and aligned to the business strategy.

To support these two factors, there are six components, or goals, of compensation philosophy:

  • Attract top talent from the market
  • Retain difference-makers
  • Inspire stellar performance
  • Pay competitively in global operations
  • Support the business strategy
  • Balance profitability, growth, and expense control

Compensation professionals must meet with senior executives to collect their insights on these key topics. Speak their language when discussing pay, and present information that is most critical to executives’ top priorities.

When forming compensation decisions, here are some external questions to consider:

  • Where does the company want to position itself relative to the broad and specific industry?
    Keep in mind that compensation data may need to be reviewed outside of your specific niche.
  • Who are our top competitors for business? Who are our top competitors for talent?
    The answers to these questions won’t necessarily be the same, so analyzing factors can help you take a more competitive approach to recruiting and retaining talent.
  • Are there geographical differences to consider?
    Consider how pay might differ across various locations and types of communities, including major urban cities versus rural locations.

When basing compensation decisions on internal factors, consider how pay might differ:

  • In the same role
  • In the same level or grade
  • In the same industry segment
  • In the same performance category

With an increasing demand for pay transparency, you must have consistent methodology for determining compensation. These factors can be used as a starting point and may serve as a framework for discussions with senior management.

Compensation Philosophy Examples

According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For those that do not, here is one sample to review:

COMPANY believes that it is in the best interest of both the organization and our associates to fairly pay our workforce for the value of the work provided, within its financial ability to do so. It is our intention to use a competitive system that will determine the current market value of a position based on the skills, knowledge, and behaviors required of a fully competent job incumbent. The system will be objective and non-discriminatory. It must also be flexible enough to ensure that the company is able to recruit and retain a highly qualified workforce.

Of course, a pay philosophy must be upheld through action. To translate the above philosophy into an actionable process, here are the key steps which the company might take in this example:

  • The compensation system will price positions using local, national, and industry-specific survey data. We will evaluate external equity, which is the relative marketplace job worth of jobs directly comparable to jobs within _____.
  • All jobs will be placed in a hierarchy based on: 1) market rate, and 2) comparison to other jobs within _____ based on skills, knowledge, training required, experience, responsibility, and accountability
  • COMPANY intends to monitor the marketplace in which it competes for talent and when warranted, at management’s discretion, increases may be made to the base pay of incumbents whose jobs are covered by the scope of this policy.

While reviewing examples may provide inspiration for developing a compensation philosophy for your company, be sure to incorporate your own business goals and corporate culture so your philosophy is appropriately aligned with your company strategy.

HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.