Writing a Compensation Philosophy? 

Last week I covered common compensation questions but I kept coming back to the fact that to answer a lot of the questions you need a solid compensation philosophy. 

So today we’re writing one together!

But as always, feel free to edit what’s here to align with your organization. 

A compensation philosophy should cover:

• Objective: why does this document exist? 
• Factors: what is considered when it comes to determining compensation?
• Pay Structure: how is compensation structured at the organization? 
• Performance Management: how does the performance process influence compensation? 

📣The ultimate goal of a compensation philosophy is to answer: how are employees compensated?

Let’s look at each of the core components and how to answer that elusive question. 

Objective:

The objective of your comp philosophy is probably the easiest part to write… 

An objective clearly states what the goals of your compensation philosophy are, like:

• Attracting and retaining top talent 
• Promoting fairness and equity in your organization 
• Motivating employees 
• Aligning comp with the org’s broader objectives 

That can look like this: 

Objective: to design, develop and implement a compensation philosophy that attracts, motivates and retains top talent, promotes fairness and equity, and aligns with the organization’s values and strategic goals. 

💡The objective section would be an excellent time to bring in company values and personalize this section to your organization. 

Ex: a more personalized objective for an organization values transparency / continuous growth  

Objective: At Company XX we value building a transparent and growth oriented organization. Our compensation philosophy aims to openly share how we think about compensation in an effort to attract and retain top talent, foster continuous learning, and advance the career of employees. Our ultimate goal is to ensure that employees feel valued and motivated to contribute to the success of the organization. 

✅ Do: 

• Personalize it to your organization 
• Be transparent about what matters 

❌ Don’t: 

• Say anything you don’t mean. This isn’t meant to be aspirational its meant to be what you are actually doing. 

Factors:

This section will be a choose your own adventure and very relevant to your organization, industry and leadership buy-in. 

When it comes to your compensation philosophy your factors are anything that can greatly influence your strategy. 

2 big factors you should consider: 

1. Is your compensation location specific? Meaning are you paying more $$ for expensive tier 1 cities like NYC, SF or is your compensation location agnostic? When the world went remote it brought up a lot of interesting conversations about location based pay with some organizations saying employees who moved to cheaper cities would have to take a pay adjustment. Some companies are location agnostic instead opting to pay based on contribution. 

To note: this is an organizational decision meaning you should be prepared to have conversations with your decision makers about which approach the org will take and WHY. 

2. What percentile are you aiming for? Percentiles help to position your salaries relative to the market. Some organizations pick a specific percentile to target like median, 50th percentile. Essentially this can help with ensuring your pay is competitive.  

Pro-tip: I would consider the standard for your industry and understand where your organization wants to be. If you want to clear the market on talent then offer the highest, most competitive salaries. That comes with its own issues though! 

✅ Do: 

• Personalize it to your organization 
• Explain why the decision was made

❌ Don’t: 

• Make decisions in a vacuum, what you choose will impact your compensation long term so be intentional! 

Pay Structure: 

^^ your employees. 

Everyone at your organization should know how their pay is structured. 

Your pay structure defines the components make up compensation like: 

• Base pay 
• Bonus  
• Variable
• Equity 

✍️This section should outline fixed vs variable AND what criteria is used to determine pay levels. 

A double whammy. 

Here’s what this looks like: 

This section of the compensation philosophy defines how compensation is structured across the organization and what criteria are considered for each. 

💰Base pay: a predetermined amount that an employee receives in exchange for their work. Base pay is the foundation of an employee’s compensation and it is determined based on the following factors:

• Market value of role 
• Skills and experience 
• Internal equity 
• Optional: if your organization decided on location base pay you would mention that here! 

💰Bonus pay: a reward given to employees in the form of additional compensation leveraged as a form of recognition for:

• Exceptional performance
• Achievement of goal
• Important contribution to an organization’s success 

The criteria for bonuses are outlined in advance and are tied to individual, team, and/or company performance. 

Bonuses can be leveraged in other forms such as signing bonuses, retention bonuses or profit-sharing. 

Pro-tip: if bonuses are only leveraged for certain roles this would be an opportunity to be transparent here about what roles are eligible and why! 

💰Variable pay: additional compensation that can fluctuate based on organizational or individual performance. Variable pay is recurring and determined based on: 

• Metrics
• Goals
• KPIs

Variable pay can take different forms such as: commissions, profit-sharing stock options or performance-based incentives. 

💰 Equity: granting ownership stakes in the company in the form of stock options, restricted stock units (RSUs) or other forms of equity. Equity is determined based on: 

• Role
• Scope 
• Impact to organization 
• Market 
• Company stage 

Equity can be awarded in other instances such as: anniversaries, promotions, and high performance. 

Pro-tip: This will absolutely require leadership buy-in!! How each organization discusses equity as a form of compensation will be different but being transparent on how it is determined and opportunities in the future to receive more is crucial.  

✅ Do: 

• Personalize it to your organization (ALWAYS)
• Explain all criteria – this is crucial for equity 
• Add any relevant pay structures at your organization

❌ Don’t: 

• Leave anything ambiguous. Imagine you’re reading as an employee and think about what questions you would have. 

Performance Management:

^^ employees when they hear their compensation is based on performance.

I cannot talk about writing a compensation philosophy without discussing performance management. 

Performance management impacts how employees are compensated based on their performance, contributions and achievements. 

When integrating PM into your compensation philosophy be sure to discuss:

• Performance evaluation criteria: usually a mix of qualitative and quantitative 
• Review process: how often, who participates (managers, peers, etc), and documentation system. 
• Link to compensation: how does performance impact compensation and what cadence should employees expect changes to their compensation. 
• Fairness: how is the process designed to be fair and equitable? 

To note: This section will be entirely custom to your PM practices. 

But it HAS TO go into your compensation philosophy. 

Why? Because performance & compensation often go hand and hand at organizations. 

Despite me wanting otherwise…

✅ Do: 

• Personalize it to your organization (is this annoying yet??)
• Have your PM process fully mapped
• Work with your leadership team & finance team to understand impact to budgets and align them with your process 

❌ Don’t: 

• Leave this section out

A Note on Equity…  

GUESS WHAT? 

By documenting and being transparent with your compensation philosophy you are on your journey to building a more equitable workplace. 

Now, sticking to your compensation philosophy is another challenge. 

How do you secure that elusive buy-in from everyone involved? 

Well, well, well I guess you know what to look forward to next week!!!

Also, if you loved this edition and are wondering how to turn it into your compensation philosophy – here’s a gift!!
🎁 A template for you.