For decades, companies have kept employee compensation packages shrouded in mystery. According to a 2010 study from the Institute for Women’s Policy Research (IWPR), 66% of private employers actively discouraged salary discussions or formally prohibited them, with some even punishing employees for talking about pay and benefits.
But a lot has changed in the work world since then. Younger workers are more likely to talk about their earnings — about 40% of Generation Z and millennial employees say they have shared salary info with coworkers or professional contacts, compared to 31% of Generation X workers and 19% of baby boomers, according to a 2022 Bankrate survey.
In the US, new pay transparency laws are also driving many employers to rethink their compensation philosophy — the framework they use to guide decisions about employee salaries and benefits.
Like a company mission or values statement, “a compensation philosophy is just another one of those pillars that goes into helping set and manage expectations,” said Jessica Lambrecht, cofounder and CEO of The Rise Journey, a human resources strategy and organizational culture consulting firm. “And having clarity on how they are compensated and how they can affect their own compensation…so they feel they have control over their careers…is really important to people.”
Here’s what employers and human resources professionals should know as they set out to define their organization's compensation philosophy.
What is a compensation philosophy?
A compensation philosophy outlines the guiding principles that cover how an organization pays and rewards its employees. It’s “your strategic blueprint for making compensation decisions,” said Elliot Dinkin, partner at financial technology and insurance company Acrisure. “We have a strategic plan for our company, and we have an operating plan, and we need one…for compensation and benefits.”
A formal compensation philosophy is a mission statement or handbook that covers your approach to “total rewards” — base pay, along with bonuses, health insurance, paid time off (PTO), sick leave, flexible working hours, and retirement plans, among other perks.
Just like a corporate culture, organizations have a compensation philosophy, whether they deliberately created one or not. And operating under an outdated or unwritten philosophy can maintain pay inequity and unfairness that can lead to employee disengagement, turnover, and legal claims.
“Whatever you’re doing is becoming the culture, the norm, the philosophy,” said Ashley Cox, founder and CEO of human resources consulting firm SproutHR. “Even if you’re just continuing to do what you’ve done, you’re perpetuating whatever philosophy was either adopted intentionally or unintentionally in the past.”
You need to bring your company’s compensation philosophy into the light, so that you can make sure that it aligns with your organizational values and mission. Your comp structure should reward the employee behaviors and outcomes that you want to see — and that can only happen if it is planned deliberately.
Why do compensation philosophies matter?
With pay practices and salary levels secret for so long, bad habits and discriminatory practices have festered. Women have yet to achieve equal pay; they still earn 84% of what men take home, according to a 2022 analysis by the American Association of University Women (AAUW). And a Payscale study found that, among those who ask for a raise, white men are more likely to receive an increase than people of color are.
An intentional pay philosophy levels the playing field for managers and employees. It brings together everybody in the organization, along with their ingrained biases and personality quirks, to ensure they’re operating under the same expectations, Cox said.
“That’s the key about having a strong, well-spelled-out, well-communicated philosophy with your team [that states]: This is what we believe when it comes to pay and compensation. And this is how we implement that,” she explained.
Updating your compensation philosophy can also help you compete for top talent. According to 2021 user behavior data from recruitment company Reed.co.uk, jobs with transparent pay ranges attracted 27% more applications than job postings without salaries did.
How to Start Defining Your Compensation Philosophy
It all starts with your company values. “You have to look at what your company’s mission, vision, and values [are],” said Jodi Brandstetter, an HR consultant and unique brand positioning coach. “And make sure you tie that compensation philosophy [to] those values.”
If your compensation philosophy isn’t aligned with your mission or values, nobody is going to buy it, Cox said. An organization that builds its culture around innovation could have a very different compensation philosophy than one that values health and wellness, and each needs to be sure to tangibly connect their compensation philosophy to their company’s culture and values.
For example, a company that prioritizes innovation might design its pay practices around opportunities to reward people for their work in developing new products or ideas. “That might look like having various types of stipends, trips, [or] ways for people to just show up in the workplace [as] their [top-performing] selves and be rewarded for that,” Cox said.
On the other hand, the company that prioritizes health and wellness may be more focused on offering gym memberships, onsite yoga classes, mental health days, or unlimited paid time off, she continued.
Unsure which benefits and perks will be most appealing to your employees? You can just ask them. For instance, Lattice Engagement lets you easily survey your employees to find out which benefits and rewards would be truly meaningful to them. That way, you can tailor your compensation strategy to deliver maximum impact.
Factors to Consider When Crafting a Compensation Philosophy
Once you’ve considered how you’ll incorporate your organizational values into your comp strategy, there’s more work to be done. Organizations must consider an array of other factors related to hiring and retention when crafting or updating their compensation philosophy, such as the following:
- Business Objectives: If your business strategy requires you to hire world-class engineers to develop cutting-edge software, for example, your pay philosophy and compensation program will need to match that, Dinkin said. You’ll need to offer competitive compensation and perks to attract top talent to your organization.
- Competing Employers: When considering market salary data, don’t just compare the rates in your industry. You’ll also want to consider how much companies that are competing for the employees you want are paying. If you’re hiring people to work in a call center, for example, you may be competing with other call centers for workers — but also with local grocery stores, too, said Brandstetter. Wondering how competitive your compensation packages are? There’s a workbook for that: Compensation Benchmarking 101.
- Hard-to-Fill Jobs: If you’re having trouble attracting and retaining talent for specific roles because of competition for labor or low wages, your compensation philosophy could outline at what point special considerations should be made for jobs that are hard to fill, Dinkin said. For example, roles that remain open for longer than two months might be considered “hard to fill,” triggering incentives, such as a one-time cash bonus or an increase in the hourly rate, to help fill them.
What should comp philosophies include?
Typically, your compensation philosophy should address:
- Total Compensation: Employees typically don’t just earn a base salary. Organizations attract new hires and retain talent with a package of benefits that includes everything from health insurance and vacation time to student loan repayment. A compensation philosophy usually includes the total package. But as HR teams consider the total rewards they’ll extend, it’s important to ask employees what they actually want. “Too many times, we think [that] as business leaders [and] HR professionals, we have all the answers. And a lot of times we get it wrong when we make too many assumptions,” Cox cautioned. “Especially in a diverse workforce…it’s really important to pause and ask.”
- Salary Structure: Salary range is a compensation metric that provides the minimum and maximum range that an organization will pay people in the same job level. For employers, pay bands can help clear up misconceptions about how employees with the same role are paid and help ensure raises are doled out fairly. The level of transparency will depend on the business and is part of its pay philosophy, too. “You can share the base minimum of the different bands, [and] where you can go,” said Cox. “You can have that conversation during performance reviews. You can choose when and where to share and how deep you want to go.”
- Raise Models: An organization’s compensation philosophy also maps out how employees can earn more in pay and benefits going forward. There are various options, including profit-related pay formulas where employees are compensated based on the success of the overall business. For many companies, a performance-based model — by which employees earn more money as they hit specific targets — can work. In a 2024 UK survey by the CIPD, respondents said linking pay and performance positively impacts performance, retention, and innovation at their organizations. Compensation philosophies map out these and other practices for rewarding employees, giving them a clear vision of how pay and benefits are distributed and how they can earn more.
- Data Decisions: It’s helpful to explain how you’ll use data to reach pay decisions. For instance, Lattice’s reporting and analytics features allow you to make informed compensation decisions based on actual performance data and engagement metrics.
- Communication Strategy: “Communication is essential, especially with a topic as emotionally charged as compensation,” Cox said. “When we hide things or don’t share [information], that’s when people make assumptions, accurate or inaccurate. That’s when people start to feel like the company is hiding things on purpose, which is never a good thing.”
For more guidance on articulating your compensation philosophy, check out our workbook HR’s Guide to Compensation Transparency.
Limitations of Compensation Philosophies
A compensation structure and philosophy can bring transparency to pay practices. And when organizations do the work to be more forthright in their compensation decisions, they can ensure that all employees, regardless of who they are or what roles they occupy, are paid fairly and equitably.
But a compensation philosophy isn’t a cure-all. Employers must still be on guard for unconscious bias that can seep into compensation decisions, cautioned Matthew D. Besser, an employment discrimination and civil rights attorney at Bolek Besser Glesius and president of the Cleveland Metropolitan Bar Association. Besser advised looking out for the following:
- Opportunity Gaps: Consider a sales team where individuals must secure a specific number of new clients to reach the highest level of a pay band. If women on the sales team aren’t invited to socialize at the golf club with their male coworkers and senior managers who are networking with potential clients there, they may not have the same access to high-quality leads.
- Biased Performance Ratings: Using performance ratings to determine raises for employees works well — if nobody is bringing their unconscious bias to the conversation, noted Besser. If performance-based ratings are used, he advised including as many objective criteria as possible, and bringing in multiple individuals beyond the employee’s direct supervisor (as would happen in a 360-degree review) to rate their performance.
Regular pay audits — deep dives into the actual compensation that employees are receiving — can reveal discrepancies that need to be resolved. “Have a neutral, outside person come in and take a look at the data, and then examine [if there] are outliers across groups or outliers for a particular manager and a particular employee,” Besser said.
How often should you revisit your compensation philosophy?
Just like pay audits, a compensation philosophy is something that organizations need to revisit regularly, Cox said. She recommends reviewing them at least annually. Changes in inflation rates or major shifts in your organization — such as expanding into a new region or adding a new product line — might prompt a quicker look. High rates of turnover or a pay audit that uncovers issues could signal the need to revisit it more frequently to determine practices that need to be shored up.
“This is not like a Crockpot — there is no ‘set it and forget it,’” said Cox. “Everybody at every level needs to understand what’s relevant and important about your compensation philosophy and how it applies to your organization and aligns with your [company] values.”
Ready to get your compensation philosophy and practices on track? Lattice Compensation can help. Our software gives you everything you need to design and implement a consistent, equitable compensation policy:
- Exclusive industry benchmarking data
- Centralized compensation cycles
- Performance rating integration
- Transparent pay communication tools
- Unified employee data
With Lattice’s comprehensive toolkit, you won’t just revise your compensation system — you’ll also transform the entire organizational culture toward high performance.
Ready to get started? Download our free workbook on setting a compensation strategy, or visit our website to set up a demo of Lattice Compensation.
