When was the last time your organization’s compensation philosophy was critically reviewed and updated? Maybe your organization doesn’t even have a defined compensation philosophy, or if yours does, employees aren’t aware of it. If this feels like your organization, now might be the right time to reset and make the most of your compensation philosophy to ensure it supports your emerging talent strategy and governance practices.
At its core, a formal compensation philosophy reflects a set of beliefs, values and principles that guide employee pay decisions, often where there may be a range of choices. It helps others understand the “why” behind the decision and creates a framework for consistency. Generally, a formal compensation philosophy statement can communicate two basic questions to stakeholders: (1) what outcomes do we want from the way we allocate compensation resources, whether cash or non-cash elements? and (2) why do we believe this? An organization’s compensation strategy becomes the “how” — a plan for how an organization puts these beliefs into action.
A talent management tool
With the changing employer-employee relationship, many leading organizations have adopted more agile approaches to managing employee compensation that strengthen their competitive posture. Yet leadership at companies often avoids communicating many traditional elements of compensation because of uncertainty concerning their organization’s compensation philosophy — if the company even has one. Sometimes, the communications concerning compensation are buried deep within employee handbooks to avoid these types of conversations.
This creates a missed opportunity for many organizations. An organization’s compensation philosophy is one of the best tools available to explain the how and the why behind employee compensation. In fact, Grant Thornton’s recent State of Work in America survey shows that 20% of employees report little to no transparency into their career path, and 34% of employees cited poor communication as a top cause of work stress. A strong, well-communicated compensation philosophy can enhance employee understanding of the compensation program and promote feelings of trust.
A tool for governance
Updating your compensation philosophy? Consider these questions
- Culture and values:
- How does our compensation philosophy reinforce our culture and values?
- What reward elements differentiate our practices from the market?
- Competitive market:
- What organizations do we compete with for business? For talent?
- What is our geographic market?
- Do we want to lead, lag, or target the market for pay?
- What other factors influence total pay?
- Performance orientation:
- What factors do we use to differentiate individual pay decisions?
- To what extent is pay tied to performance?
- How is performance determined?
- Total compensation:
- How do we define total compensation?
- Open communication:
- Is the compensation philosophy accessible to employees?
- Is it easy to understand?
A growing number of states and local governments have adopted some form of expanded pay transparency laws, with Massachusetts’s, Vermont’s, and New Jersey’s laws taking effect later in 2025. One of the biggest hurdles surrounding these pay transparency laws is addressing internal concerns about pay equity. Organizations are often concerned that their employees will question how pay is determined and why others make more or less — and they’re right. Employees will question these things. Grant Thornton’s State of Work in America survey report indicated that benefits and base pay were the two highest drivers behind what attracted employees to their organization. On the other hand, pay concerns are also the number one driver behind why employees will leave.
Fortunately, organizations are increasingly facing this issue head-on. According to WorldatWork, 71% of organizations plan to adjust pay to remediate pay equity issues. However, the process shouldn’t stop there. Organizations can communicate their compensation philosophy to further reinforce the reasons why investments are made to proactively review internal pay equity and external competitiveness. By making elements of their total compensation and current cash compensation program more transparent, organizations create additional alignment between what employees experience and the principles included in the philosophy statement. This creates an environment where employees are welcome to ask questions and leaders are ready with strong, compensation philosophy-derived answers.
Finally, this reset isn’t just for the benefit of employees. Boards of directors can also use this as an opportunity to re-establish the “tone at the top.” Defining the compensation philosophy for chief executive officers and other executives under the board’s purview mitigates risk by promoting clarity and consistency in pay decisions, aligning compensation with organization goals, and reinforcing a culture of transparency. In turn, this empowers human resources and middle management and benefits the entire organization. External stakeholders and investors will also value this added clarity and guidance.
Take the first step
HR leaders can begin to reset the organization’s compensation philosophy by engaging business leaders in strategic discussions to evaluate whether the compensation philosophy is aligned with evolving business goals and workforce priorities. Simultaneously, they should consider auditing pay program governance practices to assess current policies, compliance risks, and market competitiveness. By integrating executive insights with pay program audit findings, HR can strengthen any current statement of compensation philosophy so it supports both business objectives and withstands the scrutiny that external stakeholders may create.
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