The importance of a documented compensation philosophy has become glaringly real thanks to recent events spurred by new pay transparency laws.

With organizations being forced to share base pay ranges, inequities and inconsistencies in pay are being exposed. One example of this is the viral story of Kimberly Nguyen from back in March. Kimberly saw that her company was hiring for her role and offering $32-$90K more than they were paying her. She did what I imagined others would be doing and hit the apply button.

Of course, this is what pay transparency laws were meant to expose. Anything inconsistent in your pay practices will be exposed, and that’s because many organizations don’t create standardized pay ranges and practices based on a foundational compensation philosophy.

What is a Compensation Philosophy?

Largely informed by your organization’s mission and values, the compensation philosophy is a document that provides clear intent on decisions about pay related to the attraction, motivation, and retention of employees.

Why do I need a Compensation Philosophy?

Kimberly’s story is the exact reason you need to start with a compensation philosophy because had her company established a standard guideline for making offers or pay changes like merit increases or wage adjustments practices, they wouldn’t have ended up with such a large gap in pay.

Which Type of Compensation Philosophy Should I Use?

There are four main aspects to consider when establishing your compensation philosophy:

1. Organizational Alignment
2. External Competitiveness
3. Employee Buy-in/Focus
4. Internal Equity

As a small organization, you’re most likely going to use a combination of these different aspects, but you may have never thought to utilize all of these. Many smaller organizations aren’t going to be able to match market value for their roles, but it’s still important to keep your finger on the pulse of what’s happening in the job market. And it is always important to clarify your intentions with how and why you compensate.

How Do I Write a Compensation Philosophy And Apply it to Sales?

First of all, don’t sweat it if you find yourself going back and adding things in, but don’t call it “finished” until you’re comfortable using it as a basis for all your pay decisions.

Next, follow these steps:

1. Start with your goals.

This is where you clarify your intent. Organizational alignment is the key. The individuals that excel in supporting and contributing to those objectives will expect to be rewarded for that level of performance.

A simple example for your organization might look like this:

We aim to support the growth of our organization and the well-being of our employees. Our pay should reflect an appreciation of our employees’ hard work and an intention to reward them for going above and beyond.

2. Speak to the market.

This is where you will want to address the realities of the labor market and your position in it. If you know that you pay below market levels, own it and call out your future aspirations. If you target the market median, declare it and follow through for your leaders to stand proudly by it.

An example may look like the following:

We currently target our total compensation levels at 10% below the market median for our roles. Our goal by 2025 is to be at market value as part of our organizational growth initiatives.

Alternatively:

The organization participates in a number of salary surveys in our industry and utilizes this robust market data in order to establish the market mid-point for the development of our pay structures.  

3. Address employee concerns

This is where you reinforce the values and mission of the organization and gain buy-in from employees on their part in the process of pay. In the case of clarifying an overarching philosophy, you may emphasize the risk and reward connection and the prevalence of variable pay eligibility as well as intentions of pay transparency and professional development.

A possible example might be the following:

Our employees are important to us. We offer a generous variable pay program. Knowing that our employees rely on their performance-based pay to provide healthy, happy lives for themselves and their families. We adhere to a clear incentive methodology, transparent pay practices, consistent performance measurements, and regular payout timing.

4. Create a Fairness and Equity Statement

This is an opportunity to specifically address internal equity in the organization. That means a lot of things for different organizations. That equates to regulatory compliance – like pay for like work. But it also means explaining that different types of work translate into different components in the make-up of a job’s pay.

An example specific to a sales population might be the following:

Because of the nature of pay, it is important that we regularly review our compensation levels to ensure that everyone has an equal opportunity to achieve and exceed their objectives. In the event of a change in the sales coverage model, an exercise such as redrawing territories or quota allocation, the compensation plan will be reviewed to ensure fair and equitable practices are in place for all participants. Otherwise, we review our sales incentive plan annually for consistency and accuracy.

Once you’ve created your compensation philosophy, which may be as short as one page or much longer, share it with other leaders in your organization to get feedback and make sure everyone is on the same page and willing to follow through with a consistent message to the employee population.

By taking the time to do this, you’re setting yourself up to create a fair and equitable work environment, experience improved employee retention, maintain compliance with legal requirements, and many more benefits.