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on June 08, 2021 Human Resources Employee Engagement Total Rewards Statements HR Documents

What to Include in Your Compensation Philosophy Statement

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Imagine this unfortunate, but frequent, scenario. An employee contacts your HR department to discuss their concerns around compensation for their position. The employee feels they are being undervalued and underappreciated. Understanding how their work fits into the company’s success is difficult. 

The lack of transparency in the pay structure has caused a rift between workers and management. 

Do More: Sample Total Compensation Statements

As uncomfortable and awkward as the meeting may be, it's actually a sign of a larger problem within companies. Organizations that aren't able to confidently rationalize and explain their pay structure upfront run the risk of hiring workers with conflicting values. This inevitably leads to issues with retention, satisfaction, and overall performance. 

By developing a compensation philosophy statement, leadership can ensure that all employees have a clear understanding of the rationale behind the pay structure. 

Why Would You Need A Statement?

The 21st century has brought about multiple changes in the ways a company thinks about its employees. Gone are the days of a secure 9-5 job that includes full benefits, an industry-standard salary, and long-term security. 

Contract, freelance, and piece-work positions continue to rise. It's more important than ever that organizations provide good insight into the work they are asking employees to perform. 

A compensation philosophy statement is key to ensuring that current and future employees are informed about the company's financial values, strategy, and structure

Financial Structure

While many aspects of the business world are in flux, a compensation hierarchy still exists. Entry-level positions and contractors generally sit at the lower end of the spectrum, while management and C-suite positions garner the most compensation. 

The rationale for this pay discrepancy is still obvious. Leadership roles are performed by those with more experience, skill, and tenure. However, it's still important to outline how all employees benefit from the company's pay structure. 

A compensation philosophy statement should include

  • A thorough outline of base pay by position
  • An assurance that equal work receives equal pay
  • Outline any incentives and rewards, with clear steps on how they are achieved through improved performance

Employer Strategy

Unless your business is blazing trails in a niche industry, chances are there are companies who perform similar services and are actively competing with you for market share, brand appeal, and talent. 

A robust compensation philosophy should also outline how your company stacks up against the rest of the industry across key factors.

  • An objective, real-time analysis of your company's market position and transparency into the research process that justifies this valuation
  • An informed report on the industry-standard compensation structures for similar positions
  • The rationale and strategic value of any deviations in compensation from industry standards

Employee Value

Despite advances in automation, human capital remains the most essential asset to success in the marketplace. Your employees still matter the most. 

When it comes to selecting the right employee, the importance of attracting good talent cannot be understated. Their goals must be aligned with your vision. 

It's been estimated that employee turnover can add additional costs valued at over 30% of the baseline salary. Compensation philosophies are a strong tool for ensuring a match between applicant and company. 

Important internal communications, like compensation philosophy statements, provide HR-heavy businesses with an edge. From the offer letter to periodic reminders, total rewards statements can boost employee engagement.

See how backstitch's digital Total Rewards Statements update employees on their compensation in real time

Sydnie Kerr

Customer Content Manager

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