Compensation Philosophy: What is it And How To Define Yours?

Doug Conant, Former President and CEO of the Campbell Soup Company has said – “To win in the marketplace you must first win in the workplace.”

And to win in your workplace you need to have a workforce that relies on you and on whom you can rely. A study conducted by Bersin & Associates has revealed that on average customer satisfaction is 14% higher in organisations that have better employee experience.

A robust compensation philosophy = happy employees

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What is Compensation Philosophy?

It is a bridge between your business objectives and your compensation strategy to promote a culture of trust and optimise your business performance to achieve aggressive growth goals.

It can be explained with a simple example as well. Imagine Company A (Industry – Information Technology) is providing 90th percentile salary to its tech team, 75th percentile to its product team, 65th percentile to its sales team, and 50th percentile to its marketing with a strong focus on internal equity of pay.

And since it is a tech-heavy organisation, its talent team keeps a major portion of Restricted Stock Unit Awards and Annual Stock Option Awards for the long-term growth and long-term value creation of their outperforming developers.

Even this is can be considered a type of philosophy where you design compensation packages and benefits programs based on the significance of different functions within your organisation.

So, your compensation policies and approach to compensation reflect your philosophy, whether it is calculated or unintentional.

It can be how you determine salary ranges, whether you go for performance-based compensation, how you plan your reward program, key factors for rewarding your skilled employees and so many more.

It’s like your company culture that already exists as a result of your company values. Sometimes you create one deliberately and other times it is a result of your unconscious cultural measures.

“Whatever you’re doing is becoming the culture, the norm, and the philosophy,” as expressed by Ashley Cox, the founder and CEO of SproutHR, a consulting firm for Human Resources. She emphasizes that even if you continue with the same actions, you are continuing the philosophy that was adopted, intentionally or unintentionally, in the past.

Importance of a compensation philosophy for Businesses

An effective compensation philosophy is an ultimate reference for resolving uncertainties related to your compensation decisions.

Since the covid crisis, the conversations around compensation have become more frequent and a lot of dormant Human Resources struggles have been brought to light. From the interview process to employee satisfaction, everything is up for discussion.

By defining a competitive compensation philosophy, you tie the key objectives of your business strategy to your compensation framework. It helps you:

  • Create a healthy employee value proposition
  • Provide consistency to your compensation structures
  • Manage executive compensation program
  • Reward performance of key talent

What are the different types of compensation philosophies?

Given the broad features of some of the most used philosophies, we can categorise them into 4 types:

Different Compensation Philosophies in the Industry

Market Pay

So, the market pay philosophy is all about figuring out how competitively you want to position yourself within your industry (salary range positioning) when it comes to paying.

In market pay, the jobs are assessed and categorised into different grades for improved comprehension of their significance.

This grading takes into account 4 key points:

  • Complexity of role
  • Skill set required
  • Risks associated
  • Availability of talent

Equal Pay

So, there’s a philosophy out there that suggests everyone should receive the same pay, regardless of their job’s complexity or where they work.

This is more common in family-owned businesses, and one benefit is that it removes the pressure to compete with others in the market.

But, as you might imagine, this approach can also come with some challenges. The biggest issue is that not all jobs are created equal – some roles are just more demanding or require more specialised skills. When no differentiation in compensation takes these factors into account, employees may feel that equal pay is not a great payroll solution and leave altogether.

Flexible Pay

In Flexible pay, an organisation combines:

  • Market pay (which is objective and based on what other companies pay for similar jobs in the labour market)
  • Organisational culture (which is subjective and based on the company’s values and goals)

This way, companies can provide employee compensation that’s tailored to their specific needs and situations.

But, here’s the catch: while a flexible pay philosophy can be beneficial, it can also lead to problems. For example, employees might feel like they’re being treated unfairly or discriminated against if they perceive that their compensation is not in line with their colleagues.

Tailored Pay

When it comes to paying employees, some companies follow a compensation philosophy that takes into account a few different factors. These factors include:

  • Market conditions
  • Performance culture
  • Organisational capability

By tying compensation to these factors, companies can encourage their employees to achieve specific goals or work together as a team to hit predetermined targets. And if they do, they may be rewarded with things like bonus plans, annual equity awards, annual cash incentives, and more.

One of the biggest challenges here is the fluctuations in market conditions. Providing a competitive salary to your workforce might become difficult in such a case.

Examples of effective compensation philosophies that improved employee experience

While we have discussed countless theories to establish what works best, let’s follow some of the practical examples of businesses that reached a high stage of growth using strengthened compensation choices.


At Intel, one unique feature of their executive compensation program is that with their increasing responsibility, their variable compensation and equity-based compensation also increase.

They also ensure the alignment of the compensation program with the financial, operational, and stock price performance measures. By using metrics like net income growth, cumulative EPS growth, and One Intel goals, they amplify employee satisfaction and create long-term shareholder value.

News Corp

Firstly, News Corp drives company performance by providing variable, performance-based compensation. They include a balance of short- and long-term compensation elements to motivate and reward superior performance without encouraging unnecessary and excessive risk-taking.

Secondly, they align pay with performance by using a mix of performance metrics that hold executives accountable for the company and individual performance. 

How to start defining your philosophy around rewards and compensation program

More than anything else, your philosophy should be in adherence to company values. It should be a projection of your core values integrated into your compensation structure. And there are a few parameters that can help you write a compensation philosophy statement.

Define your Compensation Philosophy

Organisational capabilities

Your organisation’s capability is essentially the resources the company has in hand. While defining your philosophy, you decide on what ratio of these resources should be at the disposal of your compensation team to be able to attract, retain, and develop employees with the necessary skills and competencies to achieve the company’s objectives.

It includes a company’s financial resources, technology, and operational processes that can be leveraged to optimise the experience for the employees.

So, the first course of action is to understand what you have to offer to your employees.

Employee Perception and Values

When developing a compensation philosophy, it’s important to consider the perspective of your employees. Their perception of your current total rewards programs can provide valuable insight into what is working and what isn’t.

By asking questions such as “What do our employees value the most?” and “Which of our current programs are driving attraction, engagement, and retention?” you can gain a better understanding of what motivates and retains your workforce.

Additionally, it’s important to keep in mind that the market is constantly changing, and what may have been effective in the past may not be as relevant in a turbulent market.

Therefore, regularly seeking employee feedback and evaluating their values and priorities can help you ensure that your philosophy remains aligned with their needs and market demands.

Competitive Advantage

Every company has its unique value proposition and it is important to understand your competitive advantage to define your philosophy. 

This includes assessing how your organization is positioned within your industry, as well as understanding the external market for talent.

Go ahead and ask yourselves “Where should we position ourselves against the competition?” and “What programs do we want to be known for in the market?”

This will help you identify areas where you can differentiate yourself from the competition and incorporate those learnings into your philosophy.


Did you know that the average employee spends over 90,000 hours of their lifetime at work?

Your employees are the heart and soul of your organisation. And to optimise their experience, you need to go beyond the conventional approach.

Before this, your organisation might be operating on a traditional compensation philosophy that addresses the basic concerns. But you need to sit back and contemplate – ‘Is that enough for your employees?’

If not, now is the time to change! can aid your transformation to a real-time compensation planning platform that will help you put your best foot forward.

Our aim is to make sure that your compensation and benefits planning resonates with your employees and makes them feel valued.

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