Defining your compensation philosophy

A compensation philosophy is a formal statement about your organization’s position on employee compensation. It explains the "why" behind employee pay and creates a framework for consistency.

A compensation philosophy should take into account:

  • Operational budget of the organization
  • Strategic objectives of the organization
  • Market salary information
  • Internal/external equity
  • Legislative compliance
  • Industry competitiveness
  • Level of difficulty in finding and retaining talent

Questions to consider when developing your compensation philosophy:

  • How will your compensation program support the overall business strategy?
  • Do you have challenges finding and retaining quality talent?
  • How will your compensation program help motivate and engage current employees?
  • Does your philosophy pass the legal test? Organizations must ensure their program is fair and equitable, legally compliant and in alignment with funding agreements.
  • Is your organization best positioned to lead, match, or lag behind others in your industry and market?
Market Position Percentile Employer Type
Lead the market 75th
Pay higher than 75% of other organizations with similar positions
Organizations competing for employees in a tight labor market or organizations that want to be a high payer in the market will choose a lead position.
Match the market 50th
Pay in the middle (median) of all organizations with similar positions
Most nonprofit employers like to be competitive and will target to pay at this level. Although this approach allows employers to manage labour costs better, adjusting the compensation structure during tight labour markets is harder.
Lag the market 25th
75% of organizations with similar positions will pay higher than your organization

Employers encountering financial challenges may fall into this category and use non-financial rewards to attract and retain employees.

 

A fair and livable wage is crucial to employee well-being and quality of life. To find out more about decent work conditions and how to uphold best practices, visit the Decent Work section on HR Intervals.

Compensation Philosophy Template

[COMPANY] is committed to supporting our employees as they strive to achieve our organization’s mission of [insert mission].

[COMPANY] has established a compensation plan that is equitable, industry competitive, and fiscally responsible. To attract, maintain, and support our employees we target our pay at the 50th percentile of the competitive market. We also support employees with generous health and wellness benefits, paid time off, and pension plan contributions.

 

 

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