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Compensation Philosophy

A compensation philosophy is a comprehensive statement or policy document of the company’s position on employee compensation and it is a commitment to how it values employees. It explains the “why” behind employee pay and creates a framework for consistency.  A compensation philosophy explains how the organization’s total rewards are structured in relationship to competitors; whether the organization pays at, above or below the market.  Organizations attract, motivate and retain employees through total reward packages which are a mix of base pay, incentive pay and benefits.  These total reward elements are described in detail in a compensation philosophy.

A well-designed compensation philosophy supports the organization’s strategic plan, business goals, competitive position, and operational objectives.  A compensation philosophy is influenced by many factors, including company size, revenue, expected profits, industry, business objectives and competitiveness and market value of the company’s jobs.  The organization’s overall view and philosophy regarding the employees and responsibility for those employees will also factor in to the compensation philosophy.

Compensation philosophies are typically developed by the human resources in close collaboration with the leadership team. It is critical to obtain the input and approval of the leadership team for your compensation philosophy.  Periodic reviews are important to ensure continued effectiveness and if any modifications are needed based on current factors affecting the business.  For example, changes in the market place will occur and certain jobs can become ‘hot’ either externally in the market or internally within the company, which in turn can impact your ability to hire and retain unless certain changes are made to your pay practices.

Key components of a compensation philosophy include:

  • Competitive and attractive total reward packages that support the business objectives and recruiting efforts.
  • Employee performance motivators
  • Effective rewards to retain key talent and high-performing employees.
  • Define the organization’s competitive market position (lead, lag, etc.)
  • Define the market you will use for external market comparison or your “competitive set.”
  • Define the process used to determine internal equity (job evaluation).
  • Clearly defined management responsibilities.
  • Administration Guide for the compensation program

An effective compensation philosophy should be competitive, equitable, perceived by employees as fair, fiscally sound and legally compliant.  It is important to effectively and clearly communicate your compensation philosophy to your employees.  Transparency of an organization’s compensation philosophy can benefit employers because a sound philosophy consistently applied creates a sense of fairness.  Communication can also aid in recruiting and retaining efforts.

Maintaining a competitive advantage and being able to retain key employees is increasingly important.  At WageWatch our compensation consultants can assist with your organization’s compensation needs and help you ensure that your compensation programs are supporting your company’s business strategy and objectives.  WageWatch also offers accurate, up-to-date benefit surveys, salary surveys and pay practices data that will allow you to stay current with the times. This information is highly beneficial in creating the best salary and benefits packages that meet or rival the industry standards. For more information on our services, including consulting, salary survey data, benefit survey data and market compensation reports, please call WageWatch at 888-330-9243 or contact us online .

This entry was posted on Wednesday, August 28th, 2013 at 2:42 PM and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.