Historically, compensation philosophy statements addressed such concepts as pay and performance, risk and reward, alignment with shareholder interests – especially for executive positions – and setting compensation levels at the market median. These statements were typically written to satisfy investors and the executives who had to respond to shareholders. Outside of promising market-aligned pay, these statements rarely related to the needs of managers or the broad base of employees and consumers.
That was then. Things are considerably different now. Even prior to the pandemic, organizational leaders and compensation professionals were seeing an increased demand for gender pay equity and pay transparency. Employees want and expect to know how their work contributes to the organization and what factors determine their pay. A clear and consistently communicated compensation philosophy paves the path for a culture of trust and openness in your organization.
A compensation philosophy is a statement of a company’s commitment to compensating its employees. Its main goal is straightforward: attract, retain, and motivate the right talent for the organization. Transparency is critical. According to PayScale, “It’s not just what a company pays, it’s how they pay and how they communicate about it that has a major impact on culture, attitude, morale, engagement and performance.”
No single compensation philosophy statement fits all organizations. Your company’s philosophy statement must carefully describe and interpret your organization’s mission and purpose and authentically reflect its values. Moreover, it must put forth a holistic view of compensation by considering base salary, benefits, short- or long-term bonus or variable compensation, and other factors such as educational assistance and parental leave.
Before you craft your company’s pay philosophy, you may find it useful for company leadership and compensation professionals to explore together these strategic questions:
After you have explored the above questions, you will be well-positioned to build a pay philosophy with these components:
After the philosophy statement is drafted, test it by asking these questions:
We have created a handy checklist to help guide you as you plan, draft, and review your organization’s compensation philosophy statement. Get it here.