What Is Your Company's Compensation Philosophy?

According to 2022 data from Gartner, companies should brace for high employee turnover. As voluntary turnover soars in the post-pandemic era, companies need to be proactive in order to retain their top performers.

A compensation philosophy is one key way to keep employees engaged. Your compensation philosophy should include information about the company's pay programs and reward strategy in a way that provides a structured framework for consistency and fairness. An effective compensation philosophy will support the organization's business goals while being competitive in the market and providing valuable incentives for employees.

Your organization's compensation policy is an important component in the groundwork of your HR efforts and overall company culture. A carefully planned compensation strategy will boost morale, improve performance, and increase your bottom line.

By contrast, companies that lack clear opportunities for growth will risk losing key players to competitors.

Whether you're creating a compensation philosophy for a new business or overhauling an existing philosophy for better results, it's important to consider how you'll implement your new policy. By centralizing internal policy documentation, performance management, and payroll into one system, BambooHR makes it simple to create a cohesive experience. Learn more about our award-winning HR software today!

Why Does Your Company Need a Compensation Philosophy?

Your employees are the secret sauce to your company's success. When they're invested in your organization's goals and mission, your company realizes improved performance and higher levels of success.

Your compensation philosophy sets benchmarks and fair practices that build a culture of trust within the company and make your business an attractive workplace for talented professionals.

An effective and transparent compensation philosophy creates a cycle of successful behavior that continually improves your position in any industry. Consider these benefits of a well-planned compensation policy.

Attract Talent

In a challenging hiring market, dubbed the Great Resignation, attracting talented employees is more important than ever. Nearly 3% of the American workforce quit their jobs during August 2021, and 28% of these employees left their position without having another job lined up. For employers seeking a way to attract new talent, the reasons behind the mass exodus are crucial.

Employees cited these reasons for seeking a job change:

• 40% want more flexibility
• 37% want better compensation
• 16% want an employer who cares about their well-being

When planning your compensation philosophy, it's important to consider how employees view compensation. Surprisingly, it's not all about a higher salary. In fact, 40% of compensation from employers is non-cash.

So, what types of compensation are these vast numbers of job seekers looking for?

• 35% say paid time off is the most important perk provided by employers
• 27% want remote work opportunities
• 24% value paid family leave
• 19% seek health and fitness benefits
• 18% want financial planning and investment opportunities
• 9% are searching for jobs with professional development opportunities

Your compensation philosophy should cover any and all benefits your company provides for employees. By making this information public and transparent to your candidates and employees, you can attract and retain more talent that will likely be a good fit for your company culture.

Retain Talent

Over 63% of companies say that retaining employees is more difficult than hiring them. This is a clear indication that employers need to work harder to keep the loyal employees that already work for them.

Luckily, your compensation philosophy is the secret to decreasing rapid turnover. According to the Harvard Business Review, the number one way to boost retention in the current job market is to update your overall compensation package. Your employees rightfully expect a fair and transparent compensation philosophy—and understanding how your employees feel about their compensation will help you find ways to keep them happy. Furthermore, it's essential to produce compensation and incentives that meet your employees' needs.

Pay Equity

It's important to ensure all your employees receive equal compensation for equal work. It's also the law. The Lily Ledbetter Fair Pay Act of 2009 was created to ensure that workers don't face discrimination in pay. Your compensation philosophy should set transparent guidelines for pay rates, pay raises, non-cash incentives, and long-term compensation programs.

Motivation/Engagement

Engaged employees increase production, improve company performance, and drive company growth. Why? Because it exemplifies trust and they feel a connection to the mission of the company.

Employee engagement doesn't mean that employees are happy about everything within the workplace. They simply understand and agree with the company's goals, so they strive to help accomplish these goals. Compensation is tied to employee engagement because employees who feel valued are more likely to invest in the company's success. According to a recent Deloitte study, organizations with recognition and rewards programs improve performance by 14%.

Compensation Philosophy Examples

Your compensation philosophy will include salary and all other items that make up an employee's compensation package. This will include base pay, health insurance, wellness programs, investment opportunities, and other forms of indirect compensation including equity options, recognition and advances.

Your compensation philosophy will be more effective if written with a specific objective in mind. These goals typically include recruiting and retaining quality employees, increasing employee engagement, and providing incentives that align employee goals with company goals. While many compensation philosophies have similar features, there are different ways to create the policy.

Some common compensation philosophy examples include:

Non-Specific

If you prefer to define your policy by guidelines for compensation, a non-specific philosophy might be your best option. A non-specific compensation philosophy doesn't use hard numbers or percentages to define compensation and benefits. Instead, the policy focuses solely on the guiding principles used by the organization to determine how employees are paid.

However, the lack of clarity in a non-specific compensation philosophy might create problems with compensation and expectations. Employees who do not have clear salary targets may feel underpaid or overpaid. Also, for employees potentially receiving equity compensation, this lack of transparency limits visibility into their strike price or value of their stock options.

Percentile-Based

A percentage-based compensation philosophy makes it easy to compare company wages and compensation efforts to the regional wage market. For instance, a company that pays employees at the 50th percentile of the regional wage market employs workers that earn more than the bottom 50% of the local market, but less than the top half of the same population. Your compensation philosophy can also provide other benefits by comparing the offerings of successful local companies.

Fixed Numbers

By using exact calculations to detail wages and other benefits, a fixed-numbers philosophy provides specific data to support fair equity. This type of policy will list the exact salary for a position along with the conditions for a pay raise and the amount of the increase. Other benefits added to the philosophy will likely have a specific value assigned to them for increased clarification and transparency.

How to Write a Compensation Philosophy

Your compensation philosophy has a direct impact on your employees, your company culture, and the overall improvements the philosophy can offer your organization. This means it should be a carefully planned document that is available to all employees within your company.

Following these steps can help you write a customized, effective compensation philosophy:

• Lay the Foundation: List your company's objectives, compensation budget, potential ROI, and current compensation efforts to determine exactly what the philosophy will need.
• Research the Necessities: Your compensation philosophy will need certain elements to make it effective. Define how the philosophy will align with your business goals and take time to see how your compensation package will measure up compared to local businesses within your industry.
• Create a Clearly Structured Document: Begin with a mission statement that defines the purpose of the philosophy. Create a document that outlines all the offerings within your compensation package, how the benefits contribute to fair equity, and the salary structure for your organization.
• Build in Compliance: Research local laws and regulations to ensure your philosophy is compliant with employee pay regulations.
• Communicate Your Compensation Philosophy: Make your philosophy available to all employees within your company. You may also choose to make it (or a brief version of it) public on your company website or other publications.

Benchmark Your Compensation Philosophy Against the Market

An important part of recruiting and retaining employees is to have a competitive compensation package within the market. In other words, your compensation policy should be robust enough to avoid sending top talent running into the arms of your competitors. To ensure you have a competitive policy, it's a good idea to benchmark your compensation philosophy against the market.

Companies have traditionally relied on surveys to guide their compensation philosophy. Compensation surveys provide info about where your compensation package ranks compared to similar companies that are also participating in the survey. However, this information is often outdated and as it is self-reported, the numbers can be misleading.

Define Your Compensation Philosophy

Determine who your competitors are and note companies similar in size, sales revenue, operating budget, and industry. After you recognize the competition, consider how you want to pay your employees in comparison. Do you want to lead, match, or lag behind? When evaluating compensation, include all incentives including flexibility, career development options, and investment opportunities.

Next Steps: Create a Compensation Philosophy to Guide Your Organization

Your compensation philosophy works in a cycle to help guide your organization toward successful behavior in a variety of ways. With employee opinions surrounding pay and benefits changing, creating a compensation philosophy can help you provide transparency about the ways you compensate your employees.

BambooHR can help you better understand what you should be paying and how to effectively communicate the value of your offer that is competitive, equitable and transparent.