What is a compensation philosophy and how to set it up?
A compensation philosophy is simply a formal statement documenting the company's position about employee compensation.
In this article, you’ll learn:
- What is the difference between compensation philosophy and policies
- Why a compensation philosophy is important?
- When should you write a compensation policy?
- How to create and implement your compensation philosophy and policy? With some free templates!
What is the difference between compensation philosophy and compensation policies?
Compensation philosophy
The compensation philosophy is somewhat similar to a company mission statement with a focus on compensation.
It’s supposed to answer two main questions:
- What are your goals in terms of compensation?
- Why do you believe in these goals?
Ultimately it will detail your convictions and expectations on pay, benefits, rewards, or recognition, and set the foundations of your internal policies.
It should be part of your company culture, as a reflection of your company values.
Compensation policies
Compensation policies will be the concrete application of your philosophy: it should cascade from it, getting into more details about your market positioning, the criteria you want to use and leverage, the rules you are setting at a given time.
Eventually, it should become:
- A compensation guide for decisions around budgeting, hiring, compensation reviews, promotions, etc.
- A way for employees to project themselves compensation-wise on the long-run in your company
Why a compensation philosophy is important?
Position yourself as a competitive and engaging employer on the market
→ It helps attract the best talents for you, as a clear reflection of your culture and values.
→ It increases retention by enforcing pay equity and secures your team with detailed and well-thought infrastructure when discussing a touchy and emotional topic.
Improve employees and People team & managers’ experiences
→ Guides people teams and managers through all processes involving compensation decisions: hiring, promoting, rewarding talents.
→ Supports your organization in case of crises or market changes: policies will evolve, and following the philosophy without having to rethink everything will for sure make it easier when the time comes.
When should you write a compensation policy?
It’s never too early to define your compensation philosophy!
Every company can benefit from it. It will push you to take a step back and formalize what you want to promote, why, and how it is a really important part of your company culture.
“93% of job seekers say that salary is the most important factor when reading a job ad!” (ie. Otta blog article)
You can imagine that this number is not decreasing that much once they have joined your company!
Compensation is an emotional topic to bring up with any human being, hence the more you will clarify and explain your position as a company, the easier it will be to discuss it objectively, and the less it will be a concern for your team members who will be able to focus on more relevant topics!
As for company policies, they will most likely come later on, and more importantly, it will evolve over time, as the organization changes and internal processes evolve. It’s an iterative process, you’ll have to set it once, experience it, reassess, and improve, on a very regular basis.
A standard iteration would be over one year, but given the very intense market we’re in today (inflation, remote works, pandemics, etc.), you probably want to reassess at least some criteria of your policy once every 6 months.
Some signs that you need to invest in a compensation policy could be:
- An increase in your turnover related to compensation issues (low pay, lack of raises)
- Negative feedback from current or former employees about compensation practices
How to create and implement your compensation philosophy and policy?
Before starting things off, some practical questions.
Who should be involved in defining your compensation philosophy and policy?
Depending on your company size you will involve different people, but a safe bet is that the topic should be initiated and powered by the company founders (remember it’s fully part of the company culture and values) and that if you have a People team they will be facilitating the whole process. Then Leadership team (Heads of/C-level) will likely be involved for inputs and alignment.
Do you already have internal/external resources you can start from?
You might have already written down the beginning of ideas somewhere that you want to re-use, or read some super interesting articles (like this one 🤔!) that you can use as examples! Don’t try to reinvent the wheel when you can rely on existing content! Check out our non-exhaustive list of resources, we for sure got inspiration from them!
What’s your vision about compensation? Which values do you want to convey?
It’s time to take a good breath in, and lay on paper your strong beliefs about compensation!
What core principles do you want to apply when it comes to compensation?
You will have to define the main principles/values that are guiding your compensation decisions.
There are plenty of options, but here are some great example that you can find around you:
For Alan, not making salaries a secret also means:
- They foster trust and a sense of common purpose
- They promote self-improvement rather than negotiation
- They have to be competitive by regularly updating the grid
- They speak about problems openly
- Every employee will benefit in the success of the company
At Gorgias, they created a compensation calculator based on 3 key principles:
- Compensation should be based on data
- Compensation should reflect everyone’s ownership, meaning everyone should have equity
- Compensation should be transparent
Buffer key principles guide all decision they make about compensation and benefits:
- Transparency: they openly share their approach and salaries to create trust, hold accountability, and be a resource for the industry
- Simplicity: they aime to maintain an easy-to-understand formula
- Fairness: they ensure those with the same role and responsibilities who are at the same level of experience are paid equitably
- Generosity: they pay above market to attract the team they need, thrive as inidividuals, and avoi exceptions and inequity resulting from negotiation
What differentiate you from other companies?
Some companies decide to have some differentiators in their compensation philosophy: you might not be the employer with the best salaries, but have other great things to offer. These are things you want to highlight both to attract and retain talents!
At Shine, they believe that a company has a high social responsibility. A dependent (child or elderly) certainly makes a difference on budget management. To them “using your former “going out” budget to buy diapers and milk might not be enough”, hence they provide a “Dependent bonus”.
Zefir decided to build a salary formula rather than a more classic salary grid.Transparency means being able to make our compensation model public, both internally and externally. At Zefir, we have opted for a calculation formula that allows for modularity, clarity and upgradability over time.
At Figures we decided to position ourself on market for financial compensation, but to stand out being above market when it comes to benefits and equity, both willing to act towards an improved well-being and long term incentive that could turn out as a real game changer.
How does you compensation philosophy reflects your company culture?
This link between compensation and your culture and values will give a lot of legitimacy to your philosophy and will strongly anchor it in people's minds.
→ Is transparency part of your culture, hence you will communicate clearly and openly about it? Are you fiercely pushing for performance, hence meritocracy will be the center of your philosophy?
What’s the employee’s upside?
You want your philosophy to be attractive to your team members, so you need to explicitly show them the upsides you envision.
→ Could equity be a game changer? Are you bringing them peace of mind with a very clear and predictive path for compensation evolution? Are you enforcing equality for they not worry about it?
What are the key components of your compensation policy?
Many things can be included in a compensation policy, but the main 4 components you will encounter the most will be the following ones:
💸 Financial compensation
It includes all monetary compensation:
- Fixed salary
- Individual performance bonus/commissions
- Team bonuses (profit sharing, Spiff, etc.)
🔮 Equity
It’s your leverage to incentivize team members in the long run; include them in the adventure as potential shareholders!All kinds of equity can be included: BSPCEs, EMIs, Stock Options, RSU, free shares, etc.
❤️ Benefits
A benefit is a non-wage compensation that is used to supplement part of an individual’s salary.It includes health insurance, additional time off, flexible work time organization, remote work flexibility, etc.
➕ Perks
A perk typically consists of something that could help the employee perform a job better.It includes things like a company cars, gym memberships, standing desks, offsites/team buildings, etc.
How do you communicate about your compensation policy?
Eventually, the most important thing is that your compensation policy is
- understandable by anyone - it should be clear to newcomers and old-timers, managers, and individual contributors
- easily accessible - you don’t want to communicate once and then burry documentation where no one will find it ever again
- complete - remember that it’s a complex topic, you don’t want to give partial information that would just make things blurrier in the end
We strongly believe that your compensation philosophy should be part of the common knowledge of the company. Once again, it’s part of your culture, and who you are as an employer, and we can’t encourage you enough to communicate transparently about it.
Then, your compensation policy can be subject to full transparency, partial transparency, or no transparency at all. Then again, it depends on your company's values and how you are used to communicating with your team. Though there are a few pros and cons of a transparent compensation policy:
➕ PROS
- Creates trust
- Increases employee retention
- Enforces fair and equal pay
- Reinforces company culture
- Eases employee projection on the longer term
- Limits noise around compensation myths and rumors
- Can help attract talents
- Increase accountability
➖ CONS
- Can generate difficult conversations
- May imply internal changes before getting to transparent communication
- Can create frustration for some employees
If you want to dig deeper into transparency we have a great webinar for you to watch: Salary transparency: pros and cons with Déborah Rippol, Matt Bradburn, Hung Lee and our very own Virgile Raingeard.
And if you’re more a reader than a watcher, we also have a nice blog article for you.
How to create your very own compensation philosophy and policy?
There are many different ways to formalize your compensation policy, but here are some resources to help you through it:
Our brand new compensation policy template
While we were creating our own policy we realized that it would be easier to have a template to start with, one that you could fill in and adapt to your own needs. So no matter your industry, size of the company, or own philosophy, you can just copy the following page as a template, and make it your own, it’s all yours!
Figures compensation policy template
Then again, you might need some inspiration, so here are some resources that we found useful in our thinking process:
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