This article is part of a two-part series written with Business Sherpa Group on compensation review. We’ve covered types of compensation strategies here, and you can read the second part on conducting a compensation review at your business on the Business Sherpa Group website.
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Does your organization have a compensation philosophy? A compensation philosophy outlines how an organization supports its employees while working towards business goals. Having a clearly stated compensation philosophy ensures employees know compensation is transparent, structured, and equitable. So what approaches do businesses take?
A compensation philosophy is the guiding principles and beliefs that determine how organizations design and administer their compensation program. A compensation philosophy includes base wages, but most extend beyond that, bringing in compensation programs, bonuses, and business objectives to explain what employees can expect when working in an organization.
Why have a compensation philosophy?
There are benefits to clearly stating the compensation philosophy of an organization. On the employee side, having a clearly defined compensation philosophy gives the perception that the organizational approach to rewards is transparent, rules-based, and fair in its execution. Organizations that have an approach to compensation that is reviewed periodically can tie employee performance to business objectives, which can help identify which rewards result in the desired performance from the team. This can help managers adjust compensation plans to improve performance, workplace culture, and overall talent retention.
Have you thought about the compensation philosophy in your workplace? There are several different approaches organizations can take.
What are Compensation Philosophies?
Here are a few examples of the approach employers may take:
- Performance Based Pay
As the title suggests, this philosophy emphasizes linking compensation to performance, individually or team-based. This approach utilizes incentives such as bonuses, commissions, or profit sharing, as a reward to employees that achieve specific goals or objectives.
- Market Competitive
Organizations with this philosophy aim to offer salaries that are comparable and competitive to what the market provides. This approach includes regularly conducting market research to ensure the organization remains competitive to the best job seekers.
- Pay for Skills/Competencies
In organizations that adopt a Pay for Skills/Competencies philosophy, compensation is based on the specific skills, knowledge, and competencies that a person possesses. This approach fosters continuous learning as organizations offer resources to learn new skills.
- Internal Equity
Internal Equity aims to maintain fairness and a sense of equity within the organization. It ensures employees receive compensation that takes lots of variables into account, including job responsibilities, skills, and performance. Be wary of pay disparity when adopting this philosophy.
- Total Rewards
Total rewards takes a holistic approach, seeking to develop the whole person through financial and non-financial programs. These companies might offer bonuses, benefits, work-life balance initiatives, and career development opportunities to grow and develop their employees’ careers over time.
- Performance Driven Differentiation
An undercurrent of most hyper-competitive workplaces, a performance driven differentiation philosophy allocates compensation based on performance, with better performing individuals receiving higher compensation than those who do not perform as well.
- Employee Value Proposition
What sets this philosophy apart is the unique value proposition for employees. This value proposition is the promise of a strong culture, opportunities for growth and learning, work life balance, and meaningful work. Compensation is designed to support employee needs.
Pay Transparency
No matter the philosophy, pay transparency should remain important throughout each approach. Openness and transparency should be paramount when discussing the approach to compensation, aiming to build trust and engagement amongst your employees.
What is my compensation philosophy?
What compensation philosophy should you implement in your place of work? Before you aim to answer this question, think about the values that you hold dear in your organization. If you want to develop people’s careers and help them learn new skills, your approach to compensation is going to be a little bit different than an organization that wants people to be the very best at what they already do.
Take input from your employees on what they desire from their employer when discussing compensation. The answers might be beyond monetary rewards, you might find a desire for remote work, or chances to try different functions within the business. The compensation policies we’ve outlined are common, but that doesn’t mean they’re the only approach. You can even mix and match parts of each to form your own approach to compensation.
Compensation Philosophy and Business Objectives
So how does a compensation philosophy tie into business objectives? Well, that depends on the industry in which you operate, and what organizations within that industry do. In the second part of this article published by HR Gazette, we explore how compensation philosophies drive employees to achieve personal and business objectives.
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