Don’t have a compensation philosophy? 5 reasons why fast-growing companies need one asap
A compensation philosophy is the foundation of compensation program design. Learn what it is and how it benefits your company.
Why does your company pay the way it does?
If the people in your organization – from employees to executives – can’t answer that question with alignment and precision, your compensation program is probably missing a key component: a compensation philosophy.
A compensation philosophy is a document that explains how your company plans to pay and reward its employees based on your company’s culture, values, and financials.
A compensation philosophy is the “why” behind all pay-related decisions. It informs your compensation program design, your pay choices, and how you want to target your dollars so that you’re paying in a way that supports the current stage of your organization as well as its goals.
Here’s an example of a compensation philosophy statement, which is a snapshot of your overall compensation philosophy:
Equity is your most powerful compensation.
The problems we are trying to solve are complex, but if we solve them, the value will be enormous. Equity allows everyone on the team to share in this value, which is why we emphasize equity over cash.
The risks of operating without a compensation philosophy
Without a compensation philosophy, you’re likely navigating pay decisions with guesses, intuition, and what you think your competition is doing.
You’re risking inefficiency and underspending or overspending for certain roles. Underspending can lead to low employee retention and losing top talent to competitors. Overspending may mean you’re compensating with too much equity and risk over-dilution.
All of this stresses the relationship between your company and your employees.
A compensation philosophy replaces risk and uncertainty with clarity and confidence, so you and your employees can make better compensation decisions across the entire employee lifecycle. From offer letters to retirement, your compensation philosophy is your guide.
How a compensation philosophy benefits your company
A compensation philosophy gives your organization a solid structure for its compensation practices so you can:
- Hire – and retain – employees by communicating clear reasons behind compensation.
Often, a candidate’s or employee's satisfaction around pay is not just about the value of the package, but trust that an employer is paying fairly.
A compensation philosophy helps you explain job offers, bonuses, promotions, and changes in pay related to moves or shifts to hybrid and remote work. Your compensation philosophy demonstrates transparency and will help build a healthy relationship with employees.
- Align pay to your company’s finances.
Will you pay at or above market? Will you offer more equity than cash? Creating a compensation philosophy based on solid market analysis and benchmarking will help you answer these questions.
A compensation philosophy builds structure around data, allowing you to manage your burn rate effectively, get ahead of attrition, and avoid over-dilution.
- Spotlight behaviors you want to drive and reward.
The kind of performance you celebrate with incentives, bonuses, and promotions impacts your company’s culture. Will it be competitive or collaborative? Your compensation philosophy can help set the tone impacting overall performance and job satisfaction.
- Make pay equity and diversity part of the process, not just an intention.
Instead of reacting or racing to catch up, you can build an equitable and diverse workforce deliberately. And a well-defined strategy will help pinpoint the cause of any existing inequities, so you can correct them.
- Ease of administration for your HR and compensation team.
A compensation philosophy takes the art out of these teams' jobs, replacing it with data and clarity. Determining pay packages will be easier, and awkward conversations can be avoided because HR and compensation teams can explain their decisions with confidence.
Want to dive deeper into compensation philosophy? Download your copy of Compensation Philosophy 101.
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