A company’s compensation philosophy refers to the set of guiding principles that drive decision making about compensation. In its compensation philosophy, the firm will spell out why it makes the choices it does about how to pay employees. This philosophy differs from business to business, but every company seeks to hire and retain the best talent, and it will express that sentiment in its compensation philosophy.
A compensation philosophy based on percentiles spells out where wages will fall in relation to the regional wage market. A company that states in its philosophy that it pays its employees at the 50th percentile of the regional wage market means that its employees will earn more than 50 percent of the populace in the area. It also means employees will earn less than 50 percent of people in the wage market.
Some businesses or organizations use specific numbers in their compensation philosophies. The firm might detail that an entry level employee with zero years of experience will earn $25,000 during the first year and that if his performance during his first year warrants remaining at the company, his salary will rise to $27,500. A school might use this philosophy to determine what to pay its first-year teachers with no experience.
Compensation Package Breakdown
A business can use its compensation philosophy to spell out what its total compensation package includes. The state of Georgia’s human resources department states that it offers state workers a total compensation package, which consists of monetary compensation such as wages or base pay, indirect compensation such as health insurance and non-monetary rewards such as recognition of achievements.
A non-specific compensation philosophy will not provide fixed numbers, percentiles or even a breakdown of what the compensation package includes. Instead the philosophy will focus more on the principles that guide how the business will pay its employees. The compensation philosophy document might describe how wages should motivate and inspire employees to strive towards excellence or how the company will provide rewards and other incentives to top performers without mentioning what these bonuses will be.
- University of Minnesota; Office of Human Resources; Glossary of Compensation Terms
- 2009 Worldwide Human Resources Conference; Building Strategic Capabilities
- Compensation Philosophy; Sample Compensation Philosophy Document
- Kauffman E-Venturing; XYZ Properties LLC Sample Compensation Philosophy; Gina Galgano Hoagland
Rachel Levy Sarfin has been writing professionally since 1998. She has written for the "Yardley News" and the Healthwise Lifewise blog, and served as the Jerusalem correspondent for the Omanoot website. Sarfin completed her Master of Arts in Middle Eastern studies at the Hebrew University of Jerusalem.