Getting Clear About Your Company’s Compensation Philosophy

Maintaining a well-defined compensation philosophy is essential for any organization. It defines the organization's values and priorities while guiding management decisions that impact employees' compensation and benefits.

Compliance with employment laws is crucial in today's competitive job market, and job postings need to meet multiple requirements beyond salary ranges. These may include document retention, equity data reporting, and job description provision.

However creating salary ranges is a necessary step to ensuring your company meets its compliance requirements and to do so, employers must get clear on three aspects of this process:

What Is a Compensation Philosophy?

In today's complex regulatory environment, where legal compliance is a must, having a solid compensation philosophy in place is more crucial than ever. The compensation philosophy is the backbone of any compensation program, and it states the company’s position on employee compensation.

It takes into consideration the following to establish appropriate compensation levels for all positions:

• industry
• financial position,
• business objectives,
• market peer group, and
• other unique factors of the organization.

Human Resources and executive leadership often collaborate to develop and document the compensation philosophy and it includes, among other things, the company’s desired position to market and the key elements to be included in the overall compensation package (e.g., base salary, variable compensation, and benefits).

Conducting a Thorough Job Analysis

Once the philosophy has been established, the next step in the process is to conduct a thorough job analysis of all positions in the company to clearly identify each position’s essential functions, minimum qualifications, and working conditions. This work will become the basis for identifying comparable positions across the organization, as well as for documenting clearly, defined job descriptions which can be used for market benchmarking.

Having well-defined roles will facilitate the process of collecting market data to determine the company’s overall position to market. Employers should utilize multiple, reputable, published compensation surveys to collect competitive market data by function and job level based on industry, geography, company size (e.g., revenue, sales volume, assets, operating budget, etc.), and other relevant factors. Data collected through the market study can be used to establish base salary ranges, by grouping positions together with similar market value.

Salary ranges reflect the target value a company intends to pay for a given job or jobs within a grade. The range reflects the minimum salary to be paid, the midpoint represents the market going rate, and the maximum of the range represents the highest salary to be paid for the role. Salary ranges should be reviewed and updated on an annual basis to ensure competitiveness with the market.

Employees are placed into a grade in the salary structure based on the role they are performing and paid within the salary range based on a number of factors, which may include experience, skills, competencies, or other identified job requirements.

Having a well-defined compensation structure allows employers to comply with pay transparency laws by:

• Conducting a good faith pay equity audit to identify pay inequities between employees performing similar or comparable work and develop a salary mitigation plan and strategy to address these inequities.
• Communicating salary opportunities to all existing employees based on an employee’s job and salary range, or any time an employee is promoted or transfers to another position. Increasing transparency with current staff has been shown to increase retention, engagement, and trust.
• Providing candidates with a fair, equitable, and competitive salary range when they apply for a position, so candidates understand the compensation opportunity for the role.
• Providing managers with the tools (i.e., salary structure, market intelligence) to ensure salary increases awarded are fair and equitable.

Management Training and Administration

Finally, it is important to ensure managers receive proper training regarding the compensation program and how to administer it, as questions from employees will increase as more pay transparency laws are enacted nationally.

To ensure managers are properly trained on additional pay policies and equipped to manage pay equity and pay transparency requirements, organizations should implement a comprehensive training process. This process typically involves a combination of training sessions, workshops, and resources designed specifically for managers.

These training sessions should cover essential topics such as the following:

• the organization's compensation philosophy,
• the importance of pay equity and transparency,
• legal requirements related to pay, and
• how to identify and address potential biases in pay decisions.

Additionally, managers should be provided with tools and resources, such as job evaluation rubrics and compensation guidelines, to assist them in making fair and consistent pay decisions.

Regular refresher training and ongoing support should also be provided to ensure managers stay updated on any changes in laws or regulations and continue to implement best practices in managing pay equity and transparency. By ensuring managers are properly trained, organizations can foster a culture of fairness and transparency in compensation practices, mitigating risks and promoting employee trust and engagement.

Additional pay policies to manage pay equity and pay transparency requirements may be needed and multi-state employers should consider state-specific regulations as they relate to disclosures and reporting to ensure overall compliance.

For guidance when building out your 2024 strategy, watch our 2024 Compensation Trends webinar and access the planning toolkit.