How To Create A Compensation Philosophy Statement

What is a compensation philosophy statement?

A compensation philosophy statement is a formal document detailing your pay principles. It states why a company pays employees a certain way which helps attract, retain and motivate them. A great compensation philosophy statement can also ensure that employees understand the reward process and that it can be considered fair and equitable.

How do you create a compensation philosophy statement?

To create a compensation philosophy statement, you must first identify pay principles. Each pay principle should provide:

• 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.

To help you identify your organization’s pay principles, answer these 4 questions:

1. Where do we want to fit regarding compensation in our industry and market? Bottom quartile? Industry average? Top quartile?
2. Do we set firm pay ranges for positions?  Or are we willing to make exceptions for candidates when necessary for variable pay, even though it might cause wage disparity within a team?
3. What’s our take on matching offers made to existing employees?  Do we believe in paying more to keep good people if they resign for a “better offer”?
4. What role do benefits (health insurance, 401(k), etc) play in our overall compensation package? Do we want our benefits plan to be below market, at market or above market? Why?

   Example Pay Principles

Question	Pay Principle	Example Statement
Where do want to fit regarding compensation in our industry and market? Bottom quartile? Industry average? Top quartile?	We pay what a job is worth.	We will use the 50th percentile of base salary as the target for employee base pay. Individual placement against that target will be based on experience and performance.
Do we set firm pay ranges for positions? Or are we willing to make exceptions for candidates when necessary for variable pay, even though it might cause wage disparity within a team?	We recognize and reward individual and group performance.	We will use variable pay as a financial incentive for performance-based goals. These targets are used to establish the amount of incentive an employee is eligible to receive for outstanding performance.
What’s our take on matching offers made to existing employees? Do we believe in paying more to keep good people if they resign for a “better offer”?	We want to retain talent that has helped grow the business.	We will match an offer if we see the need for such talent in our company. If we have hired great talent and they are considering leaving for a “better offer”, then we would offer to pay more to retain that talent. It’s better to retain than continuously hire.
What role do benefits (health, 401(k), etc) play in our overall compensation package? Do we want our benefits plan to be below market, at market or above market? Why?	We believe that all employees deserve standard benefits.	We will offer all employees health insurance, dental and a vision plan. We want our employees feel like they are fully covered and protected with above market benefits.

  If you are considering variable pay, here is a compensation breakdown table to help organize your budget.

Compensation Breakdown for Variable Pay

We use variable pay as a financial incentive for rewarding individuals and company goal attainment based on the level within the organization. The following chart should be used as a basis for determining the allocation of variable pay attributable to individual goal vs company goals.

Employee Role	Base Salary/ Hourly Wage	Commissions	Benefits	Total Comp Estimate
[Individual Contributor]		0-15% / 85-100%
[Individual Contributor]
Manager/Director		0-15% / 85-100%
Executive		0-15% / 85-100%

  Your company’s compensation philosophy statement is a key aspect of your employer brand. The way you handle offers, promotions, yearly increases, bonuses, equity, and benefits affect perceptions about your company and directly contributes to employee satisfaction.