As organizations become more public about their practices regarding equal pay, the topic of salary transparency will begin to enter the mainstream. Companies can strengthen their employer brands by demonstrating a commitment to equal pay and salary transparency.
What is a Compensation Philosophy?
A compensation philosophy is a formal statement that explains the "why" of employee compensation to create a consistent framework. Having a compensation philosophy ensures that your company has consistency across salary, bonus and incentive structures.
How to Develop Your Compensation Philosophy
A deliberate, structured approach to compensation should reflect your company’s values and those of the employment marketplace. Defining a company compensation philosphy will allow you to communicate a consistent message to candidates and employees.
This consistency helps to eliminate confusion and can minimize emotional reactions to pay decisions. How your company approaches salary, bonuses and equity should be a team effort led by your executives. When defining a company philosophy of compensation, consider the following:
1) Market Factors
Look at company size, growth stage, location, industry and employer competition. How do all these factors influence your company’s attractiveness as an employer? Which domain expertise is most competitive in your area?
2) Employee Value Proposition
Consider your total reviews and compensation package as a powerful way to bring your company’s employee value proposition to life. How you reward and support employees for the work they do is one of the most powerful ways to drive a differentiated employee experience. What behaviors and work culture are you trying to drive?
3) Pay Range Positioning
What percentile of the market do you want to target or position yourself against as an organization? For example, one company may have a philosophy of paying in the 90th percentile of published pay ranges, while another might routinely pay at the median. Pay scale goals may vary by department given the importance of certain staff to the company’s business performance. The target percentile may vary by department, depending on the importance of a specific skill set to the company’s business.
4) Growth Opportunities
Some companies may be able to justify paying at the lower end of a pay range simply because of brand name recognition and long-term value to an individual’s career path. Smaller companies may offer rapid career growth opportunities. Consider how your approach to employee growth factors into candidates’ decisions to take a job with your company, and how you will compensate them as they grow in skills and experience.
5) Equity Positioning
Whether your company is public or private, consider the perceived potential value of the equity. What is the mix of cash and equity relative to the total compensation package, and what’s the risk/reward tradeoff for employees? Additionally, define a plan for distributing equity along with tenure and promotions.
6) Internal Data
Recruiters have information on what candidates are seeking and why they decline offers. Exit interviews are another source of information. Are employees leaving for a higher salary or more growth opportunities? Are declined offers or exits more or less prevalent in a given department or role?
You should review all the above information on an annual or semi-annual basis. Adjustments to your approach on compensation may be needed due to factors such as market developments, business changes, or management turnover.
Compensation Philosphy Example
If you're looking for examples of compensation philosophies, then below you'll find a copy of Stanfaord University's compensation philosophy that you can take inspiration from.
Stanford is committed to providing a fair and competitive staff compensation program that will attract, retain and reward high-performing employees at all levels. The university is also committed to providing a total staff compensation package tied to the attainment of individual and group results and the achievement of organizational goals.
Primary principles that guide our staff compensation program
- Pay what a job is worth.
- Recognize and reward individual and group performance.
The staff compensation program is designed to meet certain key objectives:
- Transparency: Provide managers and employees access to job-related content, pay guidelines and salary ranges.
- Flexibility: Support a diverse, decentralized organization to accommodate differences and changes in job requirements, job market and economy.
- External Competitiveness: Reflect pay rates for comparable jobs within the relevant labor market.
- Internal Comparability: Provide pay guidelines that ensure similar jobs are paid equitably across the organization.
- Recognition: Reward performance through salary increases, bonuses and incentives; extraordinary performance and contributions are further rewarded at a level that signifies the value of the employee to the organization and encourages retention.
Your company’s approach to its compensation philosophy is part of your employer brand. How you handle offers, promotions, yearly increases, bonuses, equity and benefits affects perceptions about your company and contributes to employee satisfaction. If you’re interested in learning more, check out Glassdoor’s Guide to Salary Conversions.