By: Amy Dozier on August 6th, 2021

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How to Create and Communicate Your Compensation Philosophy

Total Rewards | Benefits | Employee Relations

Did you know that most people consider themselves underpaid? One study shows that 64% of employees feel underpaid despite receiving the market average. A raise might not help the situation — 35% of people think they’re getting shortchanged even when they earn above average. 

Salary is one of the most crucial factors in staff retention. If people feel undervalued, they’re likely to go searching for opportunities that will pay them what they’re worth. That’s going to heap even more pressure on companies struggling to attract, retain and engage employees. 

Download an example Total Rewards statementBut the good news is that this may only be a communication issue. When people understand their employer’s compensation philosophy, they tend to feel more secure about their own salary. But how can employers get the message out? 

What is a compensation philosophy?

A compensation philosophy is an internal document that outlines the company’s approach to employee pay. Having this document allows you to create a degree of consistency and to explain decisions that might otherwise seem fair. 

You can include anything you feel relevant in your compensation philosophy. Here are a few things that you might outline in this statement: 

  • Purpose: How you intend to use your compensation program to drive performance and achieve organizational strategy
  • Values: The employee attributes that you want to reward through compensation, such as growth, innovation, reliability, and loyalty
  • Benchmarking: The nature and frequency of your regular salary benchmarking exercises
  • Performance recognition: How you intend to use bonuses and pay increases to drive performance
  • Cost controls: Budgetary considerations that might impact decisions related to pay
  • Equity and distribution: How you intend to ensure that everyone is offered a fair reward for their work, especially in relation to colleagues performing a similar role
  • Additional rewards: Non-salary elements of compensation packages, such as perks, benefits, and options
  • Compliance: Any local, state or federal laws that must be kept in mind, such as the Equal Pay Act 
  • Review period: The regularity with which you will update and amend this compensation philosophy

Your compensation philosophy should align with your company’s goals and mission statement. When people read the compensation philosophy document, they should have a clear idea of what you value most and how you reward great work. 

Managers and leaders should have a clear idea of how to apply this philosophy to salary decisions. And employees should have a clear idea of what they need to do to earn a raise. 

How to communicate your compensation philosophy

When employees complain about salary, it’s often not about the dollar amount they receive, but about fairness. If someone else is getting paid 25% more for the same amount of work, it can feel like a kick in the teeth, especially if it’s unclear why.

Sharing your compensation philosophy can help make everything feel more transparent. Here’s how to explain your compensation philosophy to your team. 

1. Have a compensation philosophy!

You might have an unwritten set of principles that guide your salary decisions, but that’s no substitute for a written document. Get all major stakeholders involved in developing a compensation philosophy. The goal is to create something that applies to the whole organization, so it needs universal support. 

Be sure to check the document with your human resources team or an HR consultant to see that it makes sense. You’ll need their help to make sure that the compensation philosophy is sustainable and affordable. They can also confirm that you’re not committing any compliance breaches.  

2. Educate local leaders

Managers and team leaders will be responsible for answering any questions about your compensation philosophy. They’ll need information seminars with senior leadership and HR, so that they can reach a full understanding of the new compensation philosophy. 

They’ll also need a point of contact that they can approach with any issues. It’s a good idea to have someone in the HR team who’s available to field compensation philosophy questions as they arise. 

3. Make it relevant

Employees don’t always care about high-level management documents. It’s hard to make the link between a broad strategy and your own day-to-day routine. Work with local leaders to find ways to make it relevant to each individual. Try to answer typical employee questions like: 

  • How do I know I’m being paid fairly?
  • Can I expect an increase in the future? 
  • What should I do to earn a raise or bonus? 
  • Why are some jobs valued differently from others?
  • What should I do if I’m unhappy with my current compensation?

These are the questions that really matter to employees. Ultimately, these concerns can dictate whether they stay put or check out the job market for more lucrative opportunities. 

4. Be transparent

In the past, some employers have tried to prevent their teams from discussing salaries. These days, there’s a greater trend towards transparency. Partly because employees can now simply visit sites like Glassdoor and view average salaries for their position. Also, some states now have pay transparency laws that guarantee the right to discuss salary with colleagues.

Pay transparency can actually be a positive thing for employers. Workers often feel underpaid because they get the impression that their colleagues are receiving substantially more than them. Open conversations about salary can dispel such doubts and improve employee satisfaction. 

5. Review and update regularly

A compensation philosophy is a living document. It’s based on things that are constantly changing, such as your growth rate, organizational goals, and external market pressures. You may also need to consider regulatory changes that impact your salary structure. 

It’s also important to check salaries and see if you’re living up to your compensation philosophy. If not, you might need to go back to the drawing board and figure out a way to create a consistent salary approach that encourages your people to do great things. 

Download an example Total Rewards statement