What is a compensation philosophy?

A compensation philosophy is your company’s official statement that dictates the reasoning behind your employee compensation decisions. This philosophy acts as the framework for determining how much you pay all your employees and explains why you are offering them that rate. A good compensation philosophy ensures that your company treats your staff equitably and that they receive the same opportunities for pay increases and advancement. You can use compensation philosophies during the recruiting and hiring phase to attract new talent to your company or use it to motivate current employees to perform well for a pay increase. 

The objective of compensation philosophies

The goal of an effective compensation philosophy should be to uphold the company’s values, business objectives and reward strategies. The compensation philosophy is a tool to motivate employees while providing a clear framework for them to reference how their performance is being measured and rewarded. With the compensation philosophy in place, there are no surprises for team members regarding their wages or the financial rewards they receive for excelling in the workplace. 

When designing your compensation philosophy, the ideology should: 

• Motivate employees to improve their performance and refine their skills 

• Make your company’s compensation packages attractive to new talent 

• Provide employees with equal opportunities for rewards and payment based on equal work

• Clearly outline your company’s reward strategies

• Explain the reasoning for pay programs within your business 

• Address your benefits program and other market variables 

Types of compensation philosophies

These compensation philosophy examples can help you determine which approach to compensation is most in line with your values. There is no right or wrong way to approach your compensation philosophy as long as the pay programs you implement within your business treat employees equitably based on the philosophy you decide upon. Employees will feel respected and valued when they can reference your compensation philosophy and understand how and why their pay is decided.

Fixed number compensation philosophy 

A fixed number compensation philosophy plainly states the base salary for each position or employment tier within your business. For example, you may have a starting salary of $30,000 for all entry-level positions with a policy of a $5,000 year-on-year increase. If after five years, 10 years or 20 years these increases vary, be sure to include those amounts in the philosophy as well. 

The benefit of a fixed number compensation philosophy is that applicants and employees can clearly see their financial reward for each year they work for the company. When you offer competitive pay rates as part of this type of compensation philosophy, you can attract and retain talented staff because they are confident about the financial amounts they’ll receive. 

Percentile-based compensation philosophy 

When a compensation philosophy is percentile-based, this means that employee wages fluctuate according to the regional wage market. For example, companies commonly use the 50th percentile in their compensation philosophy, indicating that salaries in the lower half of the job are below the 50th percentile while the other half are above. However, if you want your company to be more competitive in the current market and attract high-performing talent over your competitors, you may want to consider something more attractive, such as a compensation philosophy that pays in the 60th or 75th percentile. 

Nonspecific compensation philosophy 

Some compensation philosophies are not as specific as providing fixed numbers or percentiles. In some cases, you might prefer to simply use the compensation philosophy to provide a rationale for how employee pay will be decided without offering concrete amounts to refer to. For example, your nonspecific compensation philosophy could state that the objective of your philosophy is to retain top talent while remaining fiscally sensitive. 

Tips for developing a compensation philosophy for your company 

Your company’s human resources department is typically responsible for developing and enforcing your compensation philosophy. These are some tips this department can follow to create and maintain a compensation philosophy that serves your company in the best possible way. 

Regularly review and update the statement 

It should be reviewed routinely to keep up with changing regional wage markets, employee needs, inflation and hiring initiatives. At a minimum, your team should evaluate the compensation philosophy annually to ensure you are still providing fair opportunities to all employees and offering competitive wages for your industry.  

Ensure the compensation philosophy is legally compliant

When developing compensation philosophies, HR departments must remember that the Equal Pay Act, the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA) and the Fair Labor Standards Act (FLSA) protect employee rights. These legal protections are in place to ensure employees receive fair compensation for their work and are not mistreated or discriminated against in the workplace based on their age, ability or other factors beyond their control. Your rationale for determining payment programs and awarding pay increases must align with these legal protections. 

Use the compensation philosophy to appeal to top talent 

Compensation philosophies are a great opportunity to attract top industry performers to your business and retain them once they’re on board. To achieve this through your compensation philosophy, develop a statement that addresses key points of interest, such as fair market pay and benefits compensation packages. Where possible, include fixed numbers to make it obvious to applicants what salary expectations are realistic when they sign with your company. When these numbers are competitive, you can attract applicants who are top industry performers.

Your HR team should also be thoughtful about the language it uses to write your compensation philosophy. The way the department words the statement can determine how valued applicants and employees feel about your business. Using language that makes it clear you understand the value people add to your business makes them more likely to stick with you long-term. 

Be transparent 

Some companies have compensation philosophies that are either too vague to appeal to employees and applicants or simply don’t share this information with their employees freely. When you develop a strong compensation philosophy that explains your competitive compensation strategies and demonstrates your desire to champion equity and reward hard workers in your company, it’s beneficial to you to share this statement with employees and applicants. Be transparent in your compensation philosophy and communicate all aspects of your rationale for payment, rewards and benefits clearly so that employees and applicants feel trusted and valued.

Make it easy for everyone to access the compensation philosophy and refer back to it throughout their career. When you have a compensation philosophy you can stand behind proudly, you can include a short variation of this statement in job postings to appeal to applicants. You can also include it in your employee onboarding paperwork and benefits packages as a reference for your staff.