Compensation is an essential building block of creating an engaged workforce. Having a detailed compensation strategy encourages pay equity and builds a great employer brand. If you’re struggling to build a compensation philosophy that fits your business, this article will walk you through all the steps you need to know.

What is compensation philosophy?

A compensation philosophy is a written statement that organizations can use to organize and understand how compensation works at their company. By producing this document, your business can create a competitive compensation program that pulls highly-qualified talent into your company and keeps them there. Let's go through the steps starting with:

1. Do a deep dive to determine how your organization currently handles compensation

One of the first steps to determining how compensation structure will happen at your organization is to deeply dive into how your employees are currently paid.

Create a spreadsheet with all of your employees and their:

Title
Compensation
Years of experience
Years on the job
Benefits
Perks

Do you notice anything that's wildly misaligned? For example, do certain employees with the same title have drastically different payment structures? Can you explain pay differences based on experience or years at the company?

Pay equality (and even pay equity) are important philosophies to uphold if possible.

2. Dive into market research to determine what your competition is offering

Next, you want to take some energy to dive into market research. What compensation choices are other companies in your area offering? Try communicating with other managers in your area for intel or looking up reviews about in-area businesses.

With a bit of research, you should be able to find where your offerings fit with your competitors. If you don’t want to spend hours researching competitors, there are some companies that offer compensation market analysis that can assist you.

3. Choose a philosophy that works for your organization and employees

Once you've done market research and taken a look at the internal pay structure, you need to choose a philosophy that works for you. Here's the bottom line: your business may not be able to sustain the compensation package you want to offer. If you want to create an effective budget, you have to pick a path you can afford.

You can try a few different compensation policy options:

Market: Pay based on job complexity, qualifications, risk and talent scarcity.
Equal: Equal pay across a company regardless of job complexity.
Flexible: Using organizational culture and the market to determine rates.
Tailored: Using corporate culture, the market and employee performance to determine rates.

Besides pay rates, you also want to think about other monetary and non-monetary benefits you can offer like:

Work/Life balance
Health insurance
Bonus programs
Vacations
Career development opportunities
401(k) matching
Free meals
Discounts

It may be challenging to tie a monetary value to some of these benefits. Still, these benefits can make a huge difference in your employees' lives.

4. Communicate compensation philosophy changes and what that means for current employees

After you have made tweaks to the compensation process, you have to consider how these changes will impact current employees. While new hires making more than current hires isn't unheard of (or always bad), it doesn't always bode well for employee retention.

If possible, current employees shouldn't be punished for their loyalty to your organization. Make tweaks to ensure that current hires feel compensated appropriately for the long-term contribution to the organization. You can do this in the form of bonuses, pay raises or extra benefits. Whatever you decide to do, make sure that everyone feels good about your decision.

5. Follow-up to ensure that your compensation best practices are still working

Once you've set everyone's pay according to your new policies, don't forget to follow up. Take informal feedback as you roll out the new compensation packages. Once employees have spent a few months with their current pay, send out a compensation survey to see where you can tweak and update pay.

Does everyone feel like their job is paid well?
Is there unnecessary competition between employees with the same job?
Do tenured employees feel threatened by how much new employees make?

Understanding the answer to these questions can make all the difference when you revisit your compensation strategy at a later date.

4 compensation philosophy examples for inspiration

Now that you know the steps to create your compensation procedures, let's cover some examples from popular companies across several industries that are known for their compensation.

Are you looking for more QSR examples? Try this article that compares McDonald’s vs. KFC hourly compensation strategies.

1. Buffer

Buffer is a marketing technology company that is well-known for being transparent about its salaries. Buffer is a remote team with employees all over the globe. They strive to create fair salaries while taking into account different living situations for employees.

Their compensation strategy only considers the role/experience level and cost of living.

Buffer's pay policy is basic, but it's effective. Every employee knows that they will be paid in a transparent and fair way.

2. Apple

Apple is another organization that takes pay seriously.

One crucial part about Apple's pay philosophy is that they don't ask about prior compensation levels. Instead, Apple states, "our recruiters base offers on Apple employees in similar roles. And every year, we examine the compensation employees receive and ensure that we maintain pay equity."

This is crucial for employees who are considering getting into technology. Often employees aren't pricing themselves appropriately for roles because they come into technology from another industry.

Companies of all sizes can use Apple's approach and avoid asking for prior compensation measures. Giving your employees what you can afford versus what they have the guts to ask for will help employees feel more appreciated.

3. Citi

Next on our list is Citi. Citi has a well-thought-out compensation philosophy that connects compensation to retention.

In their brief of compensation for shareholders, Citi shares, "Employee compensation is a critical tool for Citi to attract and retain top talent and successfully execute our corporate goals."

Without proper compensation, companies won't be able to comfortably staff businesses.

We've seen how a lack of compensation has impacted companies during The Great Resignation. Several companies have boosted their pay to attract top talent to restaurants and stores. Companies who want to fully staff their shifts need to focus on providing better compensation.

4. Walmart

Last, we'll discuss Walmart's compensation philosophy. According to Walmart, they thrive on creating access to opportunities with hourly pay and incentives, career advancement, and specific help for military veterans and students. Walmart also touts their scheduling stability, health/wellness, family support and education perks.

Walmart's policy does a good job of focusing on the additional compensation that the company provides. If you cannot offer a competitive hourly wage, focusing on those other things you can provide makes a world of difference when recruiting new employees.

Create a compensation strategy that brings in top talent

Pay strategies vary wildly across companies. The best organizations have developed a strategy that helps their employees and their company thrive. Creating your first take on your company's strategy may be challenging. Understanding how much you should pay isn't easy. Hopefully this guide has helped break down some of the barriers as you determine what to pay your team members.