Determining pay ranges: How a compensation philosophy can help

Many factors go into establishing pay ranges for roles at your company — and where each employee ends up on that spectrum. The foundation that ties it all together is your compensation philosophy. Before setting your pay ranges, it is important to understand what a compensation philosophy is, why it’s important, and how it can help you establish well-informed salary ranges. Let’s dive in.

What is a compensation philosophy and why is it important?

A compensation philosophy serves as the North Star for your organization when it comes to determining how your staff is paid. Whether it’s drafted by your company’s leadership team or by an experienced compensation consultant, this is a formal document that outlines the thought process and framework for your overall compensation strategy.

This statement is essential for several reasons. First of all, it ensures employee compensation is in alignment with your vision for the organization. This vision not only encompasses the guiding principles of your mission and values but also your strategic initiatives and business goals. 

Having a compensation philosophy can also promote pay equity through consistency in the way you allocate salary and benefits. This builds trust between employees and your organization and demonstrates your dedication to fair compensation. When salaries are approached using the same philosophy across the board, you are more likely to make decisions based on your high-level goals rather than getting distracted by the person — and any unconscious biases you might have about them — on the other end of the paycheck.

Components of an effective compensation philosophy

A compensation philosophy needs to answer three different questions in order to be effective. 

1. Where do we find our ideal candidates? Identifying relevant talent markets for your business is one of the easier questions to answer. Think about where you recruit from, as well as where employees go when they move on from your company. Understanding what kinds of talent markets you are targeting will help you to pull the right data when determining what you want to offer for compensation and how it stacks up with others recruiting from the same talent pool.

2. How competitive do we want to be? This will be determined by the relationship you want to have with the going rates for positions in your talent market. Your options include:

1. • Lagging the market. With a strict budget, this question may be answered for you if you can’t afford a competitive rate, in which case you may have to lag the market and figure out other methods of attracting talent. 
   • Meeting the market. The most common choice among employers, and is when you try to match market rates for compensation.
   • Leading the market. This means you pay above the 50th percentile in your market and are aiming to attract and retain the top candidates in the field.

3. What factors will impact differences in pay? Will pay be affected by performance, giving those who meet or exceed predetermined levels of success a boost in pay as a reward? Or perhaps tenure is more important for determining raises and bonuses at your organization. Will you offer a monetary incentive for completing a course or proving mastery of certain skills? These are all important things to consider and add to your philosophy.

At Compensation Works, we dive deep into these questions to uncover the best compensation philosophy for our clients. The guidance of a professional can help to point your organization in the right direction from the start.

Get clear on your “why” when it comes to compensation

Putting time and effort into establishing a solid compensation philosophy will help you understand and communicate why your compensation plan works the way it does. When you know where you’re coming from with your decisions regarding pay practices, it makes it easier to be transparent with employees and build trust and respect throughout your organization’s culture. 

Not sure where to start? Our experienced compensation consultants at Compensation Works will work with you to create a research-backed compensation philosophy for your unique needs. Contact us today for more information on how to get started.