This covers the basics of building, communicating and leveraging your company’s compensation philosophy.
If your company has never executed this project before, you’ve come to the right place. We’ve seen hundreds of customers go through this exercise (and done it for Pave a few times), so we have a wealth of experience to draw from.
Put on your philosopher hats and let’s get started.
10,000 Foot Overview
Launching a compensation strategy can be overwhelming, but it’s a critical part of ensuring your culture is intentional and rewards the behaviors you want to see.
A compensation philosophy outlines the approach and reasoning a company uses while making compensation decisions.
Developing this critical asset helps your HR team, executives and managers clarify the “why” behind pay and creates a framework to assure consistency across the whole team. This philosophy allows you to:
- Be thoughtful about compensation decisions
- Be proactive instead of reactive
- Establish a single source of truth for compensation decisions
- Drive executive buy in
- Execute consistently against your framework
Phase 01 — Laying Groundwork
Developing Your Compensation Committee
A Compensation Committee is a group of people who provide input, raise potential issues, make decisions, and own the rollout of the compensation philosophy. Each individual on the committee is responsible for identifying and upholding our guiding principles while designing a thoughtful and intentional compensation philosophy. People to include on this committee are the CEO, Head of People, Head of Finance, etc.
Building Your Glossary of Definitions
Getting your team aligned on language is an essential lever for executing your compensation philosophy. Here are several terms you’ll want to define from the start:
- Performance Based Raises
- Market adjustment
- Cost of labor adjustment
Building Your Annual Calendar
As you plan for the next twelve months, key milestones should be established as they relate to compensation. We recommend you think monthly and quarterly as you answer these questions:
- When do performance reviews start?
- When are equity, market adjustments and cost of labor reviewed?
- When do performance reviews end?
- When are raises considered?
- What variables factor into raises?
- When are promotions considered?
- Who’s eligible for the above changes?
There are also likely to be “out of scope” issues to consider that don’t fit into a typical calendar:
- Sign on bonus
- Referral bonus
- Executive promotions
- Other instances when rules are thrown out
The Ethics of Comp Philosophy
Compensation is an inherently technical, often ambiguous subject. But it’s a serious issue that involves your team’s livelihoods. It’s also quite philosophical from a leadership standpoint. You’re going to have some tough philosophical discussions with your committee, so prepare yourself for topics such as:
- How can our team have conversations around compensation in a safe, equitable way?
- What are the tradeoffs we are incurring by making our compensation philosophy?
- Will our company pay for performance, or pay for fairness?
- How might a remote employee's status impact salary as it pertains to geographic benchmarking?
Inspiration: See Successful, Public Comp Philosophies
Sadly, too many compensation philosophies are not successful or unified. Even if they employ sophisticated spreadsheets, they’re still hard to use or decode. It’s dangerous to have inconsistent applications of comp philosophy, i.e., blind budgeting, disgruntled employees, attrition, and so on.
We’re going to be exploring a collection of publicly shared compensation philosophies we love and why. We’ve researched a cohort of company websites that transparently and publicly made their philosophies available.
Phase 02 — Comp Data, Levels, Etc.
Besides being ethical, compensation philosophies are highly technical. The best ones use real time, relevant data to support decisions. Here are the key questions your company needs to answer as it pertains to this information:
Where does the compensation data come from?
- Your source for compensation data comes from Pave. The market criteria we currently use align with our location, industry, founding status and capital raised.
Which functions are included in this compensation philosophy?
- All functions with the exception of sales. Sales has a different compensation structure.
What percentiles in cash and equity do we want to target for pay?
- For all roles, nth% of market for cash and nth % of market for equity.
How often will we review the compensation data (i.e., conduct a market adjustment)?
- We will review market data annually at a certain time, prior to the following budgeting cycle. This will result in the data set used for the following year, it’s possible this will be done every 6 months in the event of a significant change such as macro-economic shifts, company increases in size, and the company increases in value.
- It’s also possible we will provide a cost of labor adjustment , this accounts for the overall increase in salaries year-to-year dependent on the market in which the employee is located. This will be decided as part of the budgeting cycle.
How do we calculate the band or range for each level?
- Cash bands are built with three layers: low, midpoint and high. These levels are based upon market data, with low being 25% of market, midpoint being 50th% of market and high being 75% of market. Note that bands will overlap. Overlapping bands could mean that someone who is at the high end of a given band, or is a senior candidate, is already at the high end of one band or the low end of another band. As such, it’s possible that moving this person to the next level might not result in a cash increase.
- Building your compensation bands can be a daunting exercise. Luckily, we’ve seen hundreds of customers go through this exercise. So we break down the six steps every company can take to build your compensation bands in our free ebook, A Practical Guide to Building Compensation Bands in 6 Steps.
As you decide on your company’s levels, your compensation philosophy should take into account the following key elements:
What levels exist?
- What are our support functions?
- What are our professional functions?
- What are our executive functions?
As for defining these levels, you’ll want to build competencies for each, i.e., results, application, management, functional skills, etc.
Phase 03 — Communicating Philosophy
Your philosophy is only as good as the intention with which you communicate it, and the organizational structure that supports that communication. As you build out your compensation philosophy, you will need to think about communication and decision making.
More questions to ask your committee are:
- Which managers see comp data?
- What’s the process for selecting employees who get promoted?
- How are comp changes communicated 1:1 and 1:many?
- What exceptions are you willing to make as things change?
Additionally, as you build out the compensation philosophy as part of your overall compensation strategy, you’ll want to have a robust communication plan to socialize and operationalize it company wide. Here are several key touch points and outposts where you can combine your philosophical, financial and creative talents to impact your entire workforce and cascade your strategy:
- Enlisting Leaders. What conversations do you need to have with managers to equip them to execute on your compensation strategy?
- Building Assets. What kinds of slide decks, one pagers, internal wikis and other resources would help disseminate your message in a scalable way?
- Milestone Meetings. Especially if your company is building a comp philo for the first time, think about how you’ll structure your all hands meeting to communicating leveling and other elements of your plan.
- Milestone Messaging. How else will you get your team aligned? Think about how you’ll share your plan via email or other internal communications, and gather feedback to iterate.
- Training Materials. In order to execute your leveling framework, you’ll require training materials to be used by managers who are responsible for compensation decisions.
- Executive Calibration. As you gather feedback, stay in the loop with top leaders to assure company goals are satisfied. Discuss leveling, make adjustments and match data to the proper technology system.
That’s all for Compensation Philosophy 101!
We hope this guide has been helpful in laying the groundwork for your overall compensation strategy. Don’t hesitate to reach out to Pave anytime if you have questions!
Until then, remember, transparency is your best retention tool.