5 Key Elements of a Sound Compensation Philosophy

It is essential for companies to have a well thought-out compensation philosophy, regardless of what stage they are in. This can help early-stage companies as well as established companies avoid wage disparities, promote employee loyalty and morale, and expand company values.

It is not only what a company pays, but also the way it pays and how it communicates about it, that has a big influence on performance and morale, as well as engagement and output.

There is a significant discrepancy between how businesses and their employees perceive compensation transparency, which can inevitably lead to costly employee turnover. What's even worse: in a study, respondents said they left their last job because they were underpaid or felt that way.

Employee compensation problems can actually affect business success. Filling open positions takes time and money - regardless of how good your talent pipeline and recruitment team are, you are probably wasting resources in the wrong place. Ultimately, it is much more cost-effective to pay all your employees fairly than to look for "bargains" that will inevitably come to light over time and lead to turnover.

If you are considering creating a new compensation philosophy from scratch, or revising your existing one to meet current business needs - read these five steps to get you started.

Use the market data

Data is a critical element of any compensation philosophy. Use tools that allow you to compare your current and future roles to understand the market price for a particular position.

Determine their relationship to the market price

The most critical part of a compensation philosophy is determining where you stand in relation to the market price.

Take a holistic view of compensation

It is important to note that salary should only be one part of your overall compensation philosophy. Things like benefits, vacation pay, flexible work policies and perks like free lunch and dog-friendly offices should be part of the package. In fact, these elements can be especially important for smaller businesses that can't compete with the big salaries - to attract the right talent and keep existing employees happy.

Be transparent

Creating a compensation philosophy is important, and it should be made as transparent as possible.

Review employee compensation regularly

It is important to review employee compensation on a regular basis to make sure that you are staying within your budget. Tracking compensation in this way is just as important as tracking income and expenses.

Being thoughtful, transparent and aligned with your company's compensation philosophy is key to employee satisfaction and retention. Few things are more demoralizing to employees than feeling underpaid.

In light of the trend towards increased salary transparency, the days of companies making a "good deal" on in-demand talent may be coming to an end.