A compensation philosophy is a statement about what your company is trying to achieve through its compensation program and how you intend to get there. It defines, on a high level, your strategy to hire, retain, and reward talent. Compensation philosophy sets the foundation of an organization's compensation framework and establishes a cohesive set of principles throughout all levels of employees. These principles are based on the business's established vision, mission, values, and strategic objectives.

A compensation philosophy can be broken down into several high-level components:

1. Compensation Peer Group: Establishing a sample of the markets for talent that the business competes in. This often considers factors such as the size of the business, stage of development, industry, and geography of assets and operations.
2. Target Pay Positioning: Setting a standard for how the company looks to pay relative to peers for an expected level of performance. For example, a company may target pay at the median of the market or peer group. Individual target pay may deviate above or below the broader target pay philosophy to consider factors such as tenure with the business, industry experience, or demonstrable long-term performance.
3. Pay Mix: Defining the desired overall composition of pay across levels of the organization, typically composed of fixed pay in the form of base salary and variable pay in the form of short-term and long-term incentives.
4. Pay for Performance Philosophy: Guiding the risk and reward relationship inherent in variable pay programs, or, in other words, the degree of leverage to performance within compensation plans.

A well-designed compensation philosophy supports the organization's strategic plan, operating objectives, and total reward strategies. It is important to remember that a compensation philosophy sets the guidelines for making compensation decisions. However, specific considerations for establishing pay structures for individuals, roles, and levels of the organization will always require judgment and nuance to achieve the business's needs.

A compensation philosophy is essential to hiring and retaining the best talent. It should serve as a reflection of your company's values. Hugessen Consulting works with clients across a range of industries to set the strategic vision for their pay programs. In partnership with the client, we determine how compensation will guide and influence the company's broader culture and strategy.