5 Key Elements of a Solid Compensation Philosophy

A compensation philosophy is necessary no matter what stage your company is in. It can help both early stage and established companies alike to prevent wage inequality, boost employee retention and morale, and to serve as an extension of the company’s values.

Tim Low, senior vice president at PayScale, explained the significance of having a compensation philosophy, “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 and morale, engagement and performance.”

Unfortunately, there is a significant disconnect between companies and their employees when it comes to compensation transparency, which inevitably leads to costly turnover. PayScale’s 2017 Compensation Best Practices Report showed that “31 percent of employers said their company had a transparent pay policy, whereas only 23 percent of employees agreed.” What’s worse, in a recent Hired study, the top answer respondents gave for leaving their last job was because they were being underpaid.


Issues around employee compensation can have a real impact on the bottom line. Filling open roles takes time and money, and no matter how good your talent pipeline might be, if you have a leaky bucket, you’re likely wasting resources in the wrong place. Ultimately, it’s much more cost effective to pay all of your employees fairly than to look for “bargains” that will inevitably come to light, causing resentment and turnover.

So if you’re considering creating a compensation philosophy from scratch or revamping your existing one to meet current business needs, read on for five steps to set you on the right track.

Benchmark Salaries with Market Data

Data is an absolutely critical element of any compensation philosophy. Companies like PayScale, SalaryExpert and Salary.com all offer great tools to help you benchmark all your current and future roles so you can understand the market rate for a given position.

Determine Where You Pay Relative to Market Rate

Probably the most critical part of a compensation philosophy is making a determination around where you are going to pay relative to market rate. Whether it’s 50th percentile or 90th, it’s essential that you apply this standard consistently across every individual and role.


Take a Holistic View of Compensation

It’s important to note that salary should be just one part of your overall compensation philosophy. Things like equity, benefits, vacation allowances, flexible work policies, and perks like catered lunches and dog-friendly offices should all be components of a total rewards package. And indeed, for smaller companies that aren’t able to compete with the big guys on salary, these other elements can be especially important in attracting the right talent and keeping existing employees happy.

Be Transparent

Once you’ve created a compensation philosophy, it’s important to be as transparent as possible about it. This means making it part of your hiring process and running through it with all current employees, both in company-wide settings and as part of your performance and review process. It’s also important to share your strategy for ensuring that employee pay lives up to the philosophy you’ve outlined and how you’ll deal with cases of individuals who are being under compensated.

Review Employee Compensation Periodically

Do regular reviews of employee compensation to make sure that you are staying within the market range that you've committed to. Just as you track profit and revenue, make employee compensation a mission critical metric that you keep up with just as fervently.

Closing Thoughts

Being thoughtful, transparent and consistent with your compensation philosophy is one of the keys to employee happiness and retention. Few things are as demoralizing for employees than feeling that they are underpaid, or worse, that they are being paid unfairly relative to their coworkers.

Given the move towards more salary transparency and the abundance of resources that exist to help workers understand what they should be making, the days when companies could get a “good deal” on in-demand talent are rapidly coming to an end. While on the surface this may seem like something that only larger companies have the luxury of time and resources to think about, it should absolutely be on smaller companies’ radar. It really is never too early to start.

About the Author

Angelica Valentine

Angelica Valentine is a content strategist and writer for global technology companies. She holds a Bachelor’s degree in Sociology from Barnard College of Columbia University in New York City. When she isn't busy writing, this Oakland native can be found exploring music, food, and culture around the world.