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Compensation Philosophy

Your compensation philosophy is the organization’s position and approach to rewarding employees for their work. The compensation philosophy will help inform your more specific compensation strategy and define your position within the competitive market.

Continue reading to learn what a compensation philosophy is, why it’s important to define one, how to develop a compensation philosophy and how to write a compensation philosophy statement.

What Is a Compensation Philosophy?

A compensation philosophy is your organization’s approach to setting salary ranges and paying your employees. Your compensation philosophy is typically based on the company’s mission and values, along with the average market value.

The three major compensation philosophies are leading the market, lagging the market and matching the market.

Why Defining a Compensation Philosophy Is So Important

Defining a compensation philosophy helps your organization establish a more specific compensation strategy. It’s also important to define your company’s compensation philosophy in order to:

  • Align pay ranges with company objectives. A nonprofit organization’s compensation philosophy might explain that its commitment to the cause they serve is why salary ranges are below the market average.
  • Reinforce your company culture. Not only does your compensation philosophy outline your base salary structure, it can also include information about bonus programs, benefits and other incentives.
  • Remain competitive in recruiting. Using market data, your compensation philosophy should be designed to help you compete against major players within your industry for new talent.
  • Retain top talent. An enticing, competitive compensation philosophy can help employees feel valued and convince them to remain with the company long term.

How To Develop Your Compensation Philosophy

Defining your company’s position is important, but actually developing the compensation philosophy is essential to creating an environment that people want to work in. Here are a few steps to help you develop your compensation philosophy.

1. Assess Your Company’s Current Values and Financial Position

Meet with executive leaders and other key stakeholders to assess the organization’s current financial position. Leverage your company values to collaborate on the direction that you’d like to take your compensation philosophy.

If you don’t have a compensation philosophy, use this meeting to brainstorm which type best aligns with your company’s mission and values.

2. Review Market Salary Ranges

To assess where you currently land among competitors and get a better idea of where you want to position your organization, review market salary information. This can help you better understand how your competitors pay their employees and determine the unique value proposition that sets you apart from the rest.

3. Determine Salary Range Positioning

After meeting with executives and reviewing market data, determine where your salary ranges will be positioned against the industry midpoint. While you won’t include specific information about salaries in your compensation philosophy statement, determining your range helps you shape the narrative you want to tell.

4. Explore Incentive Programs and Benefits

Outside of base pay, there are bonus and incentive programs to consider incorporating into your philosophy. For example, if you select a lagging the market philosophy you can emphasize the company’s stance on a work-life balance and paid time off (PTO).

Employees may be more willing to remain at a company with lower salaries if the benefits and incentives make up for it.

5. Revisit Your Compensation Philosophy on a Regular Basis

It’s crucial to revisit your compensation philosophy on a regular basis —whether you choose to conduct annual reviews or a more frequent cadence. This ensures that your philosophy meets business needs and aligns with the vision and mission of your organization as they change.

How to Put Your Compensation Philosophy in Writing

Once you’ve developed your compensation philosophy, you have to put it in writing so you can share it with your employees and potential recruits. The following steps can help you draft your organization’s compensation philosophy statement.

1. State the Company Values and Compensation Philosophy

Your compensation philosophy will reflect your company values. By explicitly stating those values, you set the tone of your compensation philosophy statement and ensure that employees are aligned with them.

2. Call Out Factors That Differentiate You From Competitors

While you use competitor data to inform your compensation philosophy, the written statement is your opportunity to highlight the factors that set you apart from the rest. For example, if your company opts for a leading the market philosophy, you can emphasize the organization’s commitment to valuing employees over all other factors.

3. Discuss How You Determined Salary Range Positioning

Explaining the methods you took to establish salary ranges promotes transparency within your company and can help boost employee morale. Discuss the market and other components that factored into your compensation philosophy and salary range.

4. Define Your Bonus Program and Other Incentives

Aside from transparency around salary range position, clearly incorporate information about bonus programs and incentives. If you supplement a lower salary range with valuable employee benefits, you want to call that out in your compensation philosophy statement so employees are aware of these additional opportunities.

Example Compensation Philosophies

You can take a look at a few compensation philosophy examples below to see how existing organizations frame their official position.

University of Arizona

The University of Arizona’s compensation philosophy highlights that its organizational mission is to lead as a hub for groundbreaking research and an engaging academic environment that fosters a community for students to thrive in.

In order to achieve its mission, the University of Arizona addresses that it needs to establish itself as a “compelling place for talented people to build a career” within the compensation philosophy’s opening paragraph. A key component of that is to create an innovative career and compensation architecture that provides market-based compensation, clear career pathways, and career progression opportunities.

The University of Arizona’s compensation philosophy focuses on the following principles:

  • Current and market informed
  • Optimized based on available funds, fiscal responsibility and regulatory requirements
  • Benchmarked against the markets that the University competes for talent with
  • Transparent and accessible processes to enable growth and development
  • Shared governance and accountability to ensure that the University’s collective and diverse needs and interests are represented

PayScale

PayScale’s compensation philosophy is crafted in a conversational tone, making it more relatable and easier to comprehend for employees. Two key values that are highlighted in PayScale’s compensation philosophy are transparency and open communication. Its opening paragraph focuses on talking about pay and involving employees in the compensation conversation.

Where the University of Arizona’s compensation philosophy is more formal, PayScale creates an employee-focused philosophy that encompasses more than just salary. PayScale’s compensation philosophy is centered around the following components:

  • The market determines how employees are compensated
  • Work/life balance and well-being is crucial to long-term success for the business and employees
  • Pay is part of a more comprehensive compensation package that includes additional benefits and incentives

Questions You’ve Asked Us About Compensation Philosophies

How can I know if our compensation philosophy is working?
You can determine whether your compensation philosophy is working in several ways. For a firsthand account, surveys and questionnaires can help gauge employee morale and satisfaction. Reviewing retention and turnover data may help as well.
How should my organization share its compensation philosophy?
You should write a compensation philosophy statement to share your organization’s official position with employees. When launching or revamping your compensation philosophy, consider holding an all-hands meeting to walk employees through the specifics.
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