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Develop a Compensation Philosophy Statement for Today’s Times

Pave the way for a culture of trust and openness in your organization.

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 well-articulated and communicated Pay Philosophy can go a long way in ensuring that employees perceive the employer and reward process as transparent, fair and equitable”  – Compensation Philosophy, KPMG

Guiding principles for compensation practices

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:

  1. What are the company’s mission and values, and strategic plans?
  2. What are the company’s current compensation practices? Do they support the mission, values, and strategic plan?
  3. Which external market factors impact the company?
  4. Who are comparable companies and competitors you can use as benchmarks for pay practices?
  5. How are performance management and compensation related in the company?
  6. What plan is in place to communicate about compensation practices? How effective is it?

Compensation philosophy components

After you have explored the above questions, you will be well-positioned to build a pay philosophy with these components:

  • Desired market position
  • Comparator group
  • Compensation mix
  • Reward focus
  • Pay review process
  • Mode of pay differentiation

 After the philosophy statement is drafted, test it by asking these questions:

  • Is the overall program equitable?
  • Does it align with our vision and values?
  • Do employees perceive it as fair?
  • Is the overall program sensitive to our fiscal position?
  • Is the overall program and its components legally compliant?
  • Do we have a strategy for communicating our philosophy, policies, and overall program to employees?

Getting started on a compensation philosophy

We have created a handy checklist to help guide you as you plan, draft, and review your organization’s compensation philosophy statement.