Trade Secrets: Compensation Philosophy 101

In today’s competitive workplace environment, one of the most vital advantages an organization can offer its employees is a sense of trust. And one of the best ways to establish — and build on — that trust is by developing a compensation philosophy.

This formal statement documents an organization’s position on employee compensation by explaining the “why” behind pay, benefits, and perks.

“A compensation philosophy provides our clients the opportunity to communicate to employees, job candidates, and their management teams why pay is structured in a certain way, why specific benefits are offered, and how pay decisions are made in a fair manner,” says Marla Rybowiak, director of operations for The Employer Group, a Verona-based company that provides human resources and payroll-related services in over 25 states.

“I think you’ll probably find most small- to medium-size businesses don’t have a compensation philosophy, because they don’t have the HR resources,” adds Luke Anderson, payroll manager for The Employer Group. “But there definitely is a correlation with company success if you do have one.”

Among the benefits of creating and adhering to a compensation philosophy are increased transparency and trust, plus an ongoing emphasis on fairness and equal pay.

But the need to establish a compensation philosophy typically does not happen in a vacuum and often is developed in conjunction with another compensation-related project.

The Employer Group works with clients to understand their mission, values, and business objectives, and then helps them recognize how compensation and employee benefits play into those objectives. Discussions about external and internal influences on compensation also take place.

Examples of external influences may include market pay rates and changes in payroll laws and regulations. Internal influences include business size and stage of growth.

That said, Rybowiak stresses that a compensation philosophy should not be too specific, or it may need frequent updates.

“We want to keep some flexibility,” she says. “For example, you might say, ‘Our philosophy is to recognize high achievers through a bonus program based on company and individual goal achievements.’ That way, you’re not putting in specific numbers that might change every year. You might also want to state, ‘Our compensation will ultimately be based on our budget and profit and loss constraints.’”

The Wisconsin Assisted Living Association, which represents most assisted living providers in the state, implemented a compensation philosophy while completing a compensation analysis with The Employer Group and continues to reap its rewards.

“The compensation philosophy and analysis are invaluable tools and resources for our overall compensation program,” says Michael Pochowski, the association’s chief executive officer. “The Employer Group is meticulous with details and outlined how our compensation philosophy can be utilized and best fit our organization’s needs.” Ways to gauge a compensation philosophy’s effectiveness include a reduction in the number of unfair-treatment claims by employees, a noticeable increase in business sustainability, and consistently keeping pay costs within budget.

“This is a philosophy,” Rybowiak concludes. “It’s a guiding tool to help employers make decisions and help employees understand why those decisions are made.”


Contact: Angie Heim
The Employer Group
(608) 845-3377