Most startups don’t have a compensation philosophy. They have vibes. And vibes don’t help when someone asks, “Why does this person earn more than me?” But, a compensation philosophy combined with a pay principles, practices, and policies does. Let’s get into it.
What is a compensation philosophy?
A compensation philosophy explains why we compensate people the way we do here. In practice, it is used to help write, edit, and retire compensation practices and policies. When it's well-written, it should serve as a living document you go back to when faced with tough decisions.
When should you write a compensation philosophy?
Pretty early on. A simple philosophy — complete with 5-8 design principles — will help recruiters and hiring managers make fair and consistent pay decisions even before you have official levels, salary tiers or bands, and other official, repeatable practices.
Sample Design Principles: At [Company Name]...
- We want to be a talent accelerator that attracts and rapidly develops high-potential people.
- We want to attract and retain top-notch skilled professionals that will stay with our organization through multiple eras of our growth story.
- We want people to be focused on serving our mission, not gaming our compensation system.
You can't and shouldn't try to write policies for everything that could ever come up. Principles help you decide what to do when you encounter a novel situation.
How do you use compensation design principles?
Compensation design principles can be used to write and test specific pay practices. Here's how design principles might translate to aligned policies:
Sample Design Principle: We want to be a talent accelerator that attracts and rapidly develops high-potential people.
Sample Pay Policy: We benchmark at the 25th percentile for base salaries and then over-index on large learning & development budgets, career stories, and mentorship programs.
Sample Design Principle: We want to attract and retain top-notch skilled professionals that will stay with our organization through multiple eras of our growth story.
Sample Pay Policy: We benchmark at the 75th percentile for base salaries. We offer new hire, role change, and refresh grants so your long-term interests and the company's long-term interest stay aligned.
Sample Design Principle: We want people to be focused on serving our mission, not gaming our compensation system.
Sample Pay Policy: We want to be able to describe our sales incentive compensation plans in 15 seconds or less. That means we don't use more than 3 incentive levers (e.g., quota attainment, accelerator) in a given variable compensation plan.
There are no “right” or “wrong” design principles (as long as they’re legal). But, there are principles that will be better or worse for your company and what you’re trying to achieve.
How to have a comp philosophy talk with executives
Here are a series of questions to guide an executive alignment session to establish your company’s compensation design principles:
- Talent attraction and retention: Do we want to attract a specific type of talent (e.g., skills, experiences, traits)? Do we want to retain a specific type of team member? Over what time horizon?
- Market value: Do we want to be below, at, or above median market value overall? By role or impact? According to what geographic or industry “market” standard?
- Culture and inclusion: Do we want to enhance aspects of culture (e.g., encourage peer-to-peer recognition) or inclusion (e.g., pay equity) through total rewards?
- Behavioral incentives: How do we want compensation and benefits to encourage people to act (e.g., in the best interest of the customer, company, themself)?
- Financial impact: Under what circumstances does the model need to be fiscally sustainable?
Before your session, ask each leader to write down one “hot potato” comp decision they’ve had to make in the last 6 months.
Use these to anchor the conversation in reality and ensure your design principles will actually help next time.
How to equip managers to talk about compensation
Managers need to know how to talk to direct reports about compensation. My go-to here is the Why, What, and How framework.
Make sure people managers know how to explain:
- Why we compensate people the way we do at [Company Name]
- What a direct report's take-home pay is (salary + variable + stock + benefits)
- How a team member can earn more over time (if that's their goal)
📌 The Four-T Playbook: Tip, Trick, Tactic, or Template
Every edition, I’ll share a proven tip, trick, tactic, or template to help you scale faster, smarter, and more efficiently.
👉 Template: To get started, make a copy of this Compensation Philosophy Template and setup a time for an executive alignment interview.
Final Thoughts:
At tech companies, salaries and benefits often make-up 60-80% of the organization's expenses. It's worth the time to make sure that you know why you're investing those dollars the way that you are — and that they're doing the best possible job of advancing your business and talent strategy.
Until next time,
Melissa
