How to Establish a Compensation Philosophy

Sponsored by Trüpp HR, a CUES Supplier member

A compensation philosophy is fundamental to your compensation program. It is a set of principles and beliefs that guide an organization’s approach to compensating its employees. It outlines the credit union’s position on rewarding its workforce and aligning compensation practices with its overall business strategy and goals. The philosophy serves as a foundation for designing and managing compensation programs, ensuring consistency and fairness across the organization. 

At its core, your compensation philosophy defines what your credit union wants to achieve through employee compensation and how you intend to get there. While some companies may choose to emphasize financial components like performance bonuses and opportunities for salary increases, others may focus on less tangible factors like flexible schedules, work-from-home options and generous paid time off. It should encompass your strategy to hire, retain and reward talent. Compensation philosophies take many factors into account, including financial position, the size of the credit union, competitors, business objectives, the labor market, compensation trends and best practices, the unique aspects of your business, and the level of difficulty finding competent employees. 

Elements of a Well-Defined Compensation Philosophy

A well-defined compensation philosophy typically includes the following components:

• Objectives: Your compensation objectives clarify the organization’s compensation-related goals. These may include attracting and retaining top talent, motivating employees to perform at their best, promoting internal equity and ensuring competitiveness within the industry.
• Internal Equity: Address how the organization intends to maintain fairness and consistency in compensation across different job roles and levels within the company. This sets the stage for determining the relative worth of different jobs and establishing pay structures that reflect the value of each position. Where appropriate, consult state pay equity laws to ensure compliance.
• External Competitiveness: Here you will consider the organization’s position in the external job market and how it plans to compete with other employers to attract and retain skilled employees. This provides context for conducting market research and benchmarking compensation against industry standards. 
• Performance-Based Pay: Your compensation philosophy may outline the organization’s position on rewarding individual or team performance through incentives, bonuses or other performance-related pay programs. This ties compensation to achieving specific goals and aligns individual efforts with organizational objectives.
• Total Rewards: A comprehensive compensation philosophy takes into account not just base salary or wages but also other components of total rewards, such as benefits, retirement plans, stock options and other non-monetary perks.
• Transparency: Your compensation philosophy may define the level of transparency at which the organization will communicate with employees about pay practices. Openly sharing information about the rationale behind compensation decisions can foster trust and understanding; however, it may be advisable to set boundaries as to what level of information will be openly provided. 
• Legal and Regulatory Compliance: At a high level, your compensation philosophy should communicate the organization’s commitment to complying with relevant employment laws, regulations and industry standards.

Overall, a well-crafted compensation philosophy helps organizations create a structured and fair approach to rewarding their employees, contributing to employee satisfaction, engagement, and overall organizational success. It also helps HR professionals and leadership make consistent and strategic decisions about compensation-related matters.

Learn more about defining a compensation program. Once in place, a sound compensation strategy will ensure compliance with employment law, keep compensation within budget, encourage employee engagement and longevity, and facilitate organizational values and goals. 

President/CEO of Trüpp HR, a CUES Supplier member, Jean Roque has a passion for contributing to and furthering growing organizations’ success. Her straightforward yet strategic approach focuses on delivering HR services tailored to each organization’s unique needs, risks and business objectives while removing the complexity often associated with the HR function.