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Develop a Company-Wide Compensation Philosophy
Authored By: HR Performance on 4/18/2017

Key Considerations For an Effective Compensation Philosophy

Making high-stakes decisions is hard. That is why, as organizations get larger, they develop frameworks and policies which free them from having to make decisions again and again about the same topic. Those frameworks and policies also help create and explain a structure for fairness and equality within a company. A compensation philosophy does the same thing — it is made up of all of the policies that help guide an organization’s decisions about employee pay.

For example, organizations often make decisions about where an initial offer should be for pay negotiations in the salary range. If your benefits are outstanding or if you are in a location where there is high unemployment, you may want to start with a lower compa-ratio. If you are trying to recruit individuals for a very specialized position or if you are in a location that has very low unemployment, you may need to start with a higher compa-ratio. You may also determine that paying someone above 120% of the midpoint isn’t justifiable so instead of increasing their base pay, you’ll give them a lump sum payment.

There are a few key decisions you’ll want to make based on the uniqueness of your organization. Good consultants can look at your specific situation and offer recommendations. When you have some rules and guidelines drawn up, you’ll see how easy a compensation philosophy can make things. Some of the key decisions you’ll want to make include the following:

  • At what compa-ratio should a new employee start? Does having additional qualifications (such as years of experience, formal training, etc.) merit a percentage increase over the standard initial pay? 

  • How high should a compa-ratio be before the employee is no longer eligible for further increases? What practices should be used when employees reach that point? 

  • Do you want to link performance to pay? What percentage of an employee’s annual increase should the performance component represent? 

  • Are there other non- financial benefits you should consider to retain some of your cash? Can you reward employees with additional time or incentives outside of pay? 

  • Will new employees be eligible for full annual increases or prorated increases? 

  • If an employee was just promoted or given an increase, will they be eligible for a year-end increase as well? If so, is there a max percentage increase? 

  • If there is a significant change to the competitive landscape (changes to minimum wage, a new major competitor enters your market, etc.), and what practices will be initiated in order to ensure internal and external equity? 

  • How will any deviations from the standard compensation philosophy be decided? 

There is a lot to getting compensation right. Good consultants and software applications provide a lot of support as organizations think through compensation questions.
Once a framework is in place, professionals in the HR department can breathe a collective sigh of relief. There is something empowering about having thought a few moves ahead on subjects as crucial as compensation.


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