Stacks of Coins

Compensation Philosophy - Is It Really That Important?

February 01, 2017
MRA Edge
Compensation Planning
Read time: 4 mins

For many people, developing a compensation philosophy ranks right up there with cleaning out old emails—a task we know should be done but always seems to end up at the bottom of the to-do list. If you wait long enough, the IT department usually has set things up so that the oldest emails will disappear. Here’s why it is not a good idea to apply that same strategy to the task of developing your compensation philosophy.

A compensation philosophy is the company’s guiding principle regarding employee compensation decisions. Unlike old emails, your need for a compensation philosophy will not disappear—it will only become more important over time. This one or two paragraph statement will provide general direction to compensation professionals and company management when considering decisions such as what market data to align pay to, if and how to design an incentive program, what pay to offer a candidate, or what changes to make to benefit plans. Writing such a grand statement may sound intimidating, but if you know how you pay your employees and when and why you offer pay raises or incentives, you already have a compensation philosophy, or at least the start of one.

Consider the following as you develop your compensation philosophy:

  • How the elements of compensation support the goals of the organization: "We strive to offer compensation and benefits that are affordable to the business, minimize long-term liabilities, and that are competitive with leading companies in our industry."
  • What pay considerations will be based on: "We offer competitive base pay using quality, industry relevant salary surveys with a goal of matching to approximately the market 50th percentile."
  • How pay will be determined: "Pay for performance is fundamental to our compensation philosophy. Our program is designed to be fair and equitable, and to reward individuals for performance and contributions to the success of our business."
  • What elements will be included in compensation: "Base pay, incentive pay, and benefit offerings will be evaluated on a regular basis to determine their fit with and continued support of the profitability of the organization."
  • Other elements of the total compensation package: "As part of our belief in wellness, we will offer a discount on gym memberships and a wellness program designed to encourage a healthy lifestyle."

The broad language of the compensation philosophy will guide fundamental decisions and encourage consistency in these decisions. Does the company monitor the market to guide pay decisions? If so, where do they position themselves in the market? Is affordability a main consideration or is it more important to pay top dollar for
the best talent regardless of cost? What elements are included in the company’s definition of compensation? What about the criteria for pay increases—strictly market based or is there a performance element? Are there any company culture or mission priorities that should be highlighted in the compensation philosophy? Thinking about your company’s compensation philosophy, putting it in writing to share with employees, and reviewing it periodically to be sure it still is reflective of the company’s values and principles will give you a strong foundation for making compensation decisions.

As it turns out, a compensation philosophy really is that important, so if you’re tempted to regard it like cleaning out old emails, we strongly encourage you to reconsider. Tackle it now—you’ll be glad you did!

Stay tuned for next month’s article: "Survey Data—Lots of Numbers, Which One Do I Need?"

MRA’s Total Rewards team encompassing Compensation, Surveys and Benefits is here to partner with you regarding the essential steps for a comprehensive Total
Rewards approach.

This is the first of a three-part series of articles focused on compensation and salary surveys designed to launch and reinforce your journey through:

  • Leading candid discussion and succinct documentation of your organization’s compensation philosophy, or reviewing what you already have in place;
  • Understanding the importance of using reliable data to make informed business decisions impacting company costs and employees’ pay; and
  • Staying current in the use and application of credible data for compensation needs at your organization.

Source: Jane Crane, Compensation Specialist, MRA - The Management Association