How to Create a Compensation Philosophy

Summary

In this video, Caitlin Knapp, CEO and co-founder of Equity, shares expert advice on creating a robust compensation philosophy. She emphasizes the importance of aligning compensation programs with internal language, ensuring transparency, and addressing key elements like pay velocity, eligibility, and decision-making processes. Caitlin discusses how to build a philosophy that answers employees' key questions on pay and rewards, and stresses the need for regular reviews and updates. With actionable steps and expert insights, the video provides a comprehensive guide for creating a compensation framework that fosters trust and transparency within organizations.

Takeaways

• 😀 Start by understanding current compensation challenges within your organization by talking to managers, recruiters, and employees.
• 😀 Align your compensation philosophy with internal language and culture to ensure adoption and clarity.
• 😀 A robust compensation philosophy answers key employee questions about pay, decision-making, and expectations.
• 😀 Consider factors like performance, tenure, and promotions when determining when and why employees receive pay increases.
• 😀 Transparency in compensation should include salary, bonus, and equity, with clear decision-making processes.
• 😀 A compensation philosophy should be written clearly and should specify when, why, and how compensation increases happen.
• 😀 Be transparent about who makes pay decisions, whether it's HR, managers, or executives.
• 😀 Regularly review and update your compensation philosophy, ideally annually, to keep it relevant as the company grows.
• 😀 Employees want clarity on market competitiveness and how their pay compares to peers in similar roles.
• 😀 Include eligibility criteria for different types of rewards (e.g., promotions, merit increases) and specify how often these rewards happen.
• 😀 Use tools and experts to help build, automate, and maintain your compensation program to ensure consistency and efficiency.

Q & A

What is the purpose of creating a compensation philosophy?

The purpose of creating a compensation philosophy is to ensure transparency, fairness, and alignment with business goals. It provides a clear framework for making compensation decisions and helps organizations communicate how pay, bonuses, equity, and other rewards are determined.

Why is it important to understand the current language used within an organization before developing a compensation philosophy?

Understanding the current language within an organization ensures that the compensation philosophy aligns with internal communication and terminology. This makes it easier for employees, managers, and other stakeholders to understand and adopt the philosophy.

What key questions should a compensation philosophy answer for employees?

A compensation philosophy should answer questions such as: When can employees earn more pay? How is their pay determined? Who is involved in pay decisions? What expectations are attached to their pay? Where can they learn more about compensation programs?

What factors should be considered when deciding the 'pay velocity' in a compensation philosophy?

When determining pay velocity, organizations should consider the quality bar for rewards (such as performance or tenure), the timing of rewards (annual reviews or after promotions), eligibility and equitability, and the transparency of the pay structure, including salary, bonuses, and equity.

How can transparency be incorporated into a compensation philosophy?

Transparency can be incorporated by clearly explaining how total pay works (including salary, bonus, and equity), outlining who makes compensation decisions, and providing employees with access to information about the company's pay structure and decision-making processes.

Why is it important to regularly review and update a compensation philosophy?

A compensation philosophy should be reviewed and updated regularly to ensure it remains relevant as the business grows and market conditions change. This keeps the philosophy aligned with current industry standards and employee expectations, fostering trust and satisfaction.

What role do business managers and recruiters play in shaping a compensation philosophy?

Business managers and recruiters provide valuable insights into how compensation is discussed and perceived in the organization. Engaging with them helps identify challenges and areas for improvement, ensuring that the compensation philosophy is aligned with real-world needs and concerns.

What are the key components that should be included in a compensation philosophy's written statement?

A compensation philosophy's written statement should include details such as how pay increases are determined (e.g., performance reviews), when increases happen (e.g., bi-annual reviews), eligibility criteria (e.g., full-time employees), and how total compensation is structured (salary, bonuses, equity).

What are the benefits of publishing a compensation philosophy internally?

Publishing a compensation philosophy internally ensures that employees understand how their pay is determined, promotes fairness and transparency, and builds trust in the organization’s compensation practices. It also helps align employee expectations with company policies.

How can Equity assist organizations in developing and automating their compensation philosophy?

Equity can assist by providing expert guidance and a set of templates for creating a compensation philosophy. Additionally, they offer tools that automate compensation programs, including offers, compensation cycles, and range management, helping businesses implement their philosophies effectively.