Years ago, Simon Sinek gave a TED Talk on the importance of starting with the “why”.
The concept is fairly simple: define and communicate your purpose, and your audience will be more motivated and inspired.
The same principle applies to creating a compensation philosophy. Let’s dive into the why behind compensation philosophy, along with how to approach building and communicating this framework within your organization.
What is a compensation philosophy?
A compensation philosophy outlines a company’s approach and rationale for making compensation decisions throughout the organization.
This framework aids HR teams, executives, and hiring managers in understanding and articulating the reasoning behind their compensation strategies.
When effectively implemented, a compensation philosophy leads to more thoughtful pay decisions, ensures consistency and fairness in compensation practices, and helps attract and retain top talent.
What are the components of a compensation philosophy?
Compensation philosophies aren’t one-size-fits-all. Your compensation philosophy should be specific to your organization and evolve as your company does.
But, there are common elements found in most compensation philosophies, including:
- Guiding principles: Guiding principles steer the proverbial ship, ensuring alignment between your compensation philosophy and your organization's mission and values. Some companies choose to ground their compensation philosophy in transparency, consistency, and clarity, to name a few guiding principles.
- Transparency: Speaks to your organization's commitment to clear communication about how compensation decisions are made.
- Internal equity: Addresses how pay is determined based on job responsibilities, experience, and performance, promoting fairness among employees.
- Total Rewards: Details all the incentives, rewards, benefits, and perks that you offer as part of compensation. This includes things like performance-based bonuses, stock options, and other incentive structures, as well as non-monetary benefits that support employee well-being and satisfaction.
- Market position and competitiveness: Your market position identifies how you want to pay your employees compared to the companies you compete with for talent. Consider the percentiles you want to target for cash and equity compensation.
- Pay Structure: Outlines the framework for salary ranges, grades, and pay increases, ensuring consistency across roles.
How do you build a compensation philosophy?
There isn’t a standardized approach to creating a compensation philosophy. However, after working with hundreds of companies, Pave has found that most teams follow a similar process.
Here are the four primary steps teams take when building a compensation philosophy.
- Involve cross-functional stakeholders: Creating a compensation philosophy is a collaborative effort. Typically the CEO, Head of Total Rewards/HR, and Head of Finance are all involved in ideating and making compensation decisions. The compensation committee is also often listed in the final compensation philosophy document.
- Set your guiding principles: Again, guiding principles help set the tone for your entire compensation philosophy. Spend time on this step to ensure your compensation philosophy matches your culture. For example, if one of your company values is around “grit” or “play to win”, you might opt to reward high achievers through a pay-for-performance approach. Here’s an example of guiding principles you can use as a starting point:
- Consistent. Treat all employees in an equitable and consistent manner.
- Structure. Decisions are made based upon a pre-agreed structure and data.
- Incentivizes Performance. Reward and acknowledge performance.
- Clear: Appropriate and easy to understand, explain, and administer.
- Determine your approach to calculating pay and equity ranges and levels: Consider where you’ll get your compensation data from, what functions are included, what market percentiles you want to target, and how you’ll calculate ranges for each level. You can use a benchmarking tool like Pave to see how you stack up against similar companies. Make sure to consider:
- Peer group: A peer group specifies the types of companies you benchmark against for compensation. Organizations in your peer group should have similar characteristics like size, industry, and complexity.
- Market adjustment frequency: Determine how often compensation data will be reviewed – annually or biannually is common.
- Document your philosophy: You’ve done the hard work! Now, it’s time to put pen to paper and outline your philosophy. We recently rounded up some of our favorite examples of compensation philosophies on the blog (and here’s Part Two).
How do you communicate your compensation philosophy to your team?
After you’ve built your compensation philosophy, you need to determine how you’ll share it with the broader team.
Here are some best practices:
- Ensure you have executive buy-in to help guide communication and education.
- Meet with hiring managers to inform them of compensation philosophy ins and outs.
- Present new information in multiple formats and through different channels, such as all-hands presentations, 1:1 meetings, Slack conversations, and more – everyone learns differently.
- Share your completed external-facing document with employees and give them the time and space to ask questions.
Motivate your team with a robust compensation philosophy
A thoughtful compensation philosophy can have a massive impact on team morale, hiring, and retention. But, building your compensation philosophy can be a challenging process.
To get into the nitty-gritty, you need access to comprehensive market data – that’s where Pave can help. Pave provides real-time salary and equity data from over 7,500 leading companies, so you can confidently create a data-driven compensation philosophy.
Start exploring the data today in Pave’s free compensation benchmarking demo.
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