When it comes to compensation, every company is different. And you probably have a decent idea of your organisation’s general approach to compensation – even if it’s never been formalised.
But there are some major advantages to putting your compensation philosophy down on paper – like improved employee attraction, retention and morale, to name a few.
In this article, we’ll take you through everything you need to know about compensation philosophies, including what they are, why you need one and how you can go about creating one for your company.
Psst! Scroll to the end for a free template to help you create your own compensation philosophy, plus some examples from real companies!
What is a compensation philosophy?
A compensation philosophy is a formal statement that documents a company’s approach to compensation. It’s a lot like your company’s mission, vision or values statement, except that it specifically relates to compensation.
The aim of a compensation philosophy is to answer two questions:
- What are your goals in terms of compensation?
- Why do you believe in those goals?
Your compensation philosophy should detail your beliefs and expectations concerning pay, benefits, rewards and recognition. It should be underscored by your company culture and reflect your organisational values.
Ultimately, your compensation philosophy should be the foundation of all of your internal policies and processes when it comes to compensation.
Compensation philosophy vs. compensation strategy vs. policy
People use these three terms interchangeably all the time – but they're not the same thing. Think of them as three layers that build on each other.
Your philosophy sets the tone, your compensation strategy translates it into a plan, and your policy puts that plan into writing.
Do you really need a compensation philosophy?
If you’re thinking that creating a compensation philosophy sounds like a lot of work, you’re not wrong. It’s a long process that involves several different stakeholders, including your leadership, finance and HR teams (we’ll get to that in a moment).
So, why is it so important to have a compensation philosophy? Let’s see:
- 🎯 Attracts and retains talent: Having a clear compensation philosophy gives potential hires an understanding of your culture and values, and how you put them into action.
- 💬 Builds trust: Gives employees confidence that pay decisions are made on principle, not personal preference or someone’s negotiation skills, which contributes to systemic underevaluation.
- ✅ Ensures consistency: Provides managers with a clear framework for making pay decisions during hiring, promotions, and performance and compensation reviews – so they're not improvising every time.
- 📈 Drives performance: When employees understand how compensation links to their growth and contribution, it motivates them to perform at their best.
- ⚖️ Ensures pay equity: Creates a documented structure to systematically identify and address pay gaps – something that's increasingly non-negotiable ahead of the EU Pay Transparency Directive taking effect in June 2026.
- 🏢 Supports business goals: Aligns how you reward people with what your company is actually trying to achieve, keeping compensation and strategy moving in the same direction.
"The way a company allocates its increased budget says more about its culture than the amount itself. If you're not checking equity before finalising decisions, you're building problems you'll need to fix later – often at much higher cost."
— Virgile Raingeard, CEO at Figures
💡 Building a compensation philosophy starts with understanding where you stand in the market.
{{ cta }}
See how your compensation compares with 3.5M+ data points from Figures (powered by Mercer.
When should you write a compensation philosophy?
Simple answer: right now! It’s never too early to define your compensation philosophy – and it’s never too late either.
Because here’s the thing: even if you don’t yet have a formal compensation philosophy, you still have a certain approach to pay and total rewards. Just like an organisational culture, all companies have a compensation philosophy, whether or not they officially document it.
Taking the time to define your compensation philosophy (whatever stage your business is at) forces you to take a step back and formalise the things you want to promote and why you care about them. On the other hand, if you don’t put thought into your compensation philosophy, it could be sending the wrong message to your employees – or even perpetuating historical inequity and unfairness.
The key components of your compensation philosophy
Think of your compensation philosophy less as a document and more as a series of positions your company takes on pay. What do you stand for? Here are the six things you'll need to have a clear answer on.
- Market positioning: Where you aim to pay relative to competitors – at, above, or below market rates. This is your starting line. Everything else builds from it.
- Pay equity and fairness: How do you make sure people doing the same work get paid the same, regardless of gender, background, or who negotiated harder on their first day? Particularly worth getting right before the EU Pay Transparency Directive kicks in in June 2026.
- Performance rating: How individual or company performance feeds into bonuses and incentive pay. Does a great year mean a bigger cheque? Does a bad one mean nothing? Your philosophy needs to take a position.
- Total rewards approach: What you're offering beyond base salary – and how you balance it all. Most companies work with some combination of:
- Base salary and variable pay (bonuses, commissions).
- Equity (stock options, RSUs).
- Benefits (health insurance, pension, extra leave).
- Perks (professional development, wellness programmes, the ping pong table).
💡Your philosophy defines how much weight each piece gets and who's eligible for what. Spoiler: "it depends" is not a compensation philosophy.
- Transparency: How much you share with employees about how pay decisions are made – and why. Full disclosure, partial visibility, or strictly internal. There's no universal right answer, but there is a right answer for your company. (And with pay transparency laws on the horizon, it's worth having that conversation sooner rather than later.)
- Values alignment: How your approach to pay reflects what your company actually stands for. If you say you value fairness, your compensation structure and salary bands should show it. If ownership is part of your culture, equity probably needs to play a bigger role.
{{ cta }}
Putting your compensation philosophy together: 3 questions to ask
Ready to start putting your compensation philosophy together? Here are three questions to ask yourself to kickstart the process:
1. Who should be involved?
Before you can start creating your compensation philosophy, you need to get buy-in from a few different parties. The number of people involved in the process depends on the size of your company – but it should be led by your company leaders. After all, your compensation philosophy is a key part of your company’s culture and values – which means it needs to be championed from the top down.
Nobody wants to build a compensation philosophy only to have a senior leader shrug and say, "That's not really how we do things here." Get them in the room early.
Your people team also has a key role to play in facilitating the process and providing key insights into your employees and the wider market. And you’ll also need to align with your entire leadership team (the C-Suite), as their input will be invaluable.
Lastly, your finance team will be able to provide information about the company’s long-term financial position, which could influence your compensation philosophy.
2. Do you already have resources to refer to?
Here's something most companies don't realise: you probably already have a compensation philosophy. It might not be written down anywhere, but the decisions you've made about pay – however consciously or unconsciously – add up to one.
That means you may have some initial ideas written down that you can refer to when you’re putting your philosophy together.
It’s also worth looking at what other companies have done, both inside and outside of your industry. We’ve put together a list of resources that helped us to define our own compensation philosophy, to help you get started.
3. What’s your overall vision when it comes to compensation?
This is the big one. You need to think about your core beliefs when it comes to compensation: your company’s values and mission, and how they translate into your approach to compensation.
For example, let's say one of your core values is transparency. If being open and honest with your employees is an important part of your company culture, you probably want to include transparency about pay in your compensation philosophy.
You should also think about what makes you different. You might not be the highest-paying employer in your space, and that's okay – as long as you know what you're offering instead. Social responsibility, standout benefits, real flexibility, genuine career progression. These things matter. Your compensation philosophy is a good place to say so.
4. How will you position pay relative to the market?
Once you know your values, you need to decide where you want to sit relative to everyone else. There are three positions most companies land on:
- Lead: You pay above market rates – typically at the 75th percentile or higher – to attract top talent and stay ahead of competitors.
- Match: You pay in line with the market, around the 50th percentile, balancing competitiveness with budget control.
- Lag: You pay below market rates, typically at or below the 25th percentile – often offset by other benefits like equity, flexibility, or mission-driven work.
None of these is automatically right or wrong. A well-funded scale-up competing for engineers will probably lead. A purpose-driven non-profit might lag on salary but lead on everything else. The important thing is making the choice deliberately, not by accident.
And to make that choice well, you need actual market data. Figures' benchmarking tool pulls from 3.5M+ data points across Europe – so you can see exactly where your salaries sit relative to the market, by role, level, and location, before you commit to a position.
{{ cta }}
Real-world compensation philosophy examples
Need some inspiration? We’ve scoured the web for some real-world examples of companies’ compensation philosophies and how they put these into action.
But before we get into the examples, it helps to know that there are broadly four types of compensation philosophy a company can adopt.
- Performance-driven philosophies tie pay closely to individual or company results.
- Market-based philosophies anchor pay to external benchmarks and competitor rates.
- Equity-focused philosophies prioritise fair, consistent pay across the organisation – often with high levels of transparency.
- Value-based philosophies use compensation to express what the company stands for, whether that's social responsibility, collective ownership, or something else entirely.
Most companies land somewhere between two of these, which is exactly what the examples below show.
Alan (Equity-focused + Market-based)
French health insurance company Alan believes strongly in transparency when it comes to compensation. That means that they share extensive information about their compensation philosophy and policies on their website.
Crucially, Alan doesn’t believe in defining levels through job titles. Instead, levels are defined through technical exercises carried out during the hiring process. The company also provides equity to all employees, because they want employees to “act like shareholders within a culture of collective achievement.”
Gorgias (Equity-focused + Market-based)
US-based software development company Gorgias believes that compensation should be based on three key principles:
- Compensation should be based on data.
- Compensation should reflect everyone’s ownership (meaning everyone should have equity).
- Compensation should be transparent.
To put these principles into practice, Gorgias has created a compensation calculator that takes into account criteria like an employee’s position, level, location and strategic orientation to determine their salary with a fair, consistent formula.
Buffer (Value-based)
Social media scheduling tool Buffer has come up with four key principles that guide all of their decisions about compensation: transparency, simplicity, fairness and generosity.
To this end, they are also one of the few companies to publicly share all of their employees’ salaries from the CEO down – truly embodying the principle of transparency.
Shine (Value-based)
Banking company Shine believes that a company has a high social responsibility. That’s why supporting employees with children or dependents by factoring them into salary calculations is an important part of the company’s compensation philosophy.
Zefir (Value-based + Market-based)
French real estate agency Zefir decided to create a flexible formula to calculate salaries rather than a traditional salary grid. Because the company values transparency and simplicity, its compensation model is public – anyone can use their online salary calculator to see what their salary would be at Zefir.
Communicating your compensation philosophy to your employees
Once you’ve created a compensation philosophy, decide how transparent you want to be about it. At the very least, you’ll need to ensure your compensation philosophy is clear and accessible to those who use it to support decisions about pay, such as managers and team leaders.
At Figures, we believe strongly that your compensation philosophy should be part of your company’s common knowledge. Once again, it’s part of your company culture – and goes to the very core of who you are as an employer. So, it makes sense to share it with your employees.
That said, it doesn’t have to be all or nothing. Some companies opt for full transparency about their compensation philosophy, and some keep it completely confidential. But many others land somewhere in the middle, offering some level of transparency even if they don’t share everything.
Pros and cons of a transparency compensation policy
A transparent compensation philosophy can:
- Create trust with employees and managers.
- Increase employee retention.
- Promote equal and fair compensation.
- Reinforce company culture.
- Limit myths and rumours around compensation.
- Help to attract top-quality talent.
- Increase accountability for decision-makers.
There are also some perceived downsides to full transparency, such as::
- Difficult conversations about pay.
- Implies internal changes that have not yet been made transparent.
- Creates frustration for some employees.
On balance, we believe that the advantages of a transparent compensation philosophy far outweigh the potential disadvantages. Embracing full transparency requires courage and preparation, but maintaining secrecy is outdated and puts companies at a disadvantage in attracting top talent. And, particularly with the implementation of the EU pay transparency directive in June 2026, any transparency you can introduce into your compensation structure is a good thing.
If you're looking for a reliable starting point, Figures' partnership with Mercer gives you access to 3.5M+ data points across Europe – so you can build a compensation structure you're confident standing behind.
How to put your compensation philosophy together (free template)
Creating a compensation philosophy for the first time can be overwhelming – even knowing where to start can be a challenge. That’s something we realised first-hand when we were putting our own philosophy together.
To make things easier, we’ve created a free template that you can fill in and adapt to your own needs – use your compensation policy template! This template lays out the core questions you’ll need to answer to create your compensation philosophy – no matter the size of your company or the industry you’re operating in.
Learn more
Want to learn more about key compensation principles? Check out these articles:
Summarize this article with AI
No time to read it all? Get a clear, structured, and actionable summary in one click.
